Brokerage firm Nomura has downgraded HDFC Bank Ltd., India's largest private lender, to neutral from its earlier rating of buy. It has also cut the lender's price target to Rs 1,800 from Rs 1,970 earlier.
The revised price target still implies a potential upside of 10.5 percent from Monday's (September 18) closing levels.
Nomura has cited four negative surprises after the mega HDFC Bank-HDFC merger behind its downgrade. Here are the four:
First -
The networth adjustments after the merger has a negative 4 percent impact on the lender's financial year 2024 book value per share. As a result, Nomura has cut HDFC Bank's financial year 2024-2026 Earnings per Share (EPS) estimate by 5 percent to 9 percent and book value per share estimates by 7 percent over the same period.
Second - Net interest margin (NIM) estimates have been cut due to excess liquidity and accounting adjustments. Nomura expects this pressure on NIM to persist for another 2-3 quarters. The brokerage has cut its NIM estimate by nearly 25 basis points in the financial year 2024 and by 15-20 basis points over the financial year 2025-2026.
Third - Higher cost-to-income ratio due to the accounting changes. Nomura is building in a cost-to-income ratio of 40 percent for the financial year 2024 compared to 38 percent earlier, and maintaining its 39 percent to 40 percent projection over the financial year 2025-2026. The cost-to-income ratio is calculated by dividing the operating expenses by the operating income and is shown in percentage terms.
and Fourth - A sharp uptick in non-reforming assets (NPAs) in HDFC Ltd.'s corporate book. HDFC Bank held an analyst meeting on Tuesday, September 19, where it mentioned that HDFC Ltd.'s individual gross NPA ratio stood at 1 percent for the June quarter compared to 0.75 percent in March, while non-individual gross NPA ratio saw a sharp spike from 2.9 percent in March to 6.7 percent in June.
The lender also expects its Return on Assets (RoA) to be at 1.9 percent to 2 percent from 2.1 percent in June, while Return on Equity (RoE) may drop to around 16 percent from 17.2 percent in June.
Close to 18 lakh shares of HDFC Bank exchanged hands in a pre-market block deal. Buyers and sellers in the transaction are not certain yet.
Shares of HDFC Bank ended 4 percent lower at a one-month low of Rs 1,563.70. The stock contributed 50 percent to the Nifty 50's downside on Thursday.
(Edited by : Amrita)
First Published: Sept 20, 2023 7:50 AM IST
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