Spotlight on HDFC Ltd and HDFC Bank Merger !

Based on market capitalisation, the merged HDFC bank will be the fourth largest bank across the globe, after JP Morgan Chase, ICBC bank and Bank of America.

Analysts expect pressure on the net interest margin (NIM) of the merged entity in the immediate future. HDFC bank currently commands a better NIM compared with HDFC Ltd. The gross NPA ratio, post merger, will be about 1.16 percent, when compared 1.12 percent of the standalone entity. The net NPA ratio will be about 0.37 percent versus 0.27 percent currently. Furthermore, there is enough cushion in the balance sheet to improve the provision coverage ratio over a period of time.

The risk in balance sheet is expected to decline as risk weighted assets for housing finance is much lower that of a bank. Hence, for the merged entity it can decline 7 to 8 percent. Further, the cost to income ratio will benefit the most post the merger by falling to 35.2 percent versus more than 40 percent in FY23 for HDFC Bank. The bank intends to reduce this further to less than 30 percent. The return on assets is also expected to remain strong at over 2 percent for the merged entity.

July 13 onwards HDFC shall not be a part of Nifty 50 as well as BSE Sensex 30. Hence, to replace this stock, a n new stock shall be added, which analysts expect is LTIMindtree in Nifty 50 and JSW Steel in BSE Sensex 30. Henceforth, the merged entity's weightage in the indices will increase, due to their combined higher market capitalisation.

MSCI, on the other hand, has said it will use adjustment factor of 0.5 to compute merged entity's weight, which comes as a disappointment to the market. Earlier analysts anticipated inflows of $3 to 4 billion in the merged entity, however, with the MSCI's decision could result in outflows of $150 to 200 million.

However, inflows of $1.3 billion are expected on FTSE, as the weightage on this index is likely to increase, according to Nuvama.

Furthermore, in India, mutual funds have a mandate to not invest more than 10 percent in any given stock at a point of time. Hence fund managers will need to rebalance their portfolios if their holding in the merged entity is over 10 percent. However, the outflow from mutual funds in near term will not be much, as most fund managers have been preparing for such an event and already rebalanced their portfolios.

Morgan Stanley said HDFC Bank is a compounder available at attractive valuations. Morgan Stanley has a target price of Rs 2,110 on HDFC Bank, implying a 23 percent potential upside for the stock.