The recent merger involving HDFC Bank, India's largest private-sector bank, has triggered significant turbulence in the financial market, leading to a downgrade in its rating by the foreign broking firm Nomura. The bank's efforts to provide clarity on the merged entity during an analyst call inadvertently unveiled accounting adjustments that have ramifications for its book value, causing concern among investors and analysts alike.
Book value, a fundamental financial metric, reflects the net worth of a company, calculated as the difference between its total assets and total liabilities. In the case of HDFC Bank's merger, the accounting adjustments necessary for consolidation have resulted in a reduction in the combined entity's book value compared to HDFC Bank's standalone book value. Nomura, in light of this development, downgraded its rating on HDFC Bank from its previous stance to 'Neutral.'
This change in rating has reverberated through the market, leading to a sharp decline in HDFC Bank's stock price. At 9:30 am, the bank's stock was trading at Rs 1,578.05, representing a significant drop of 3.13 percent from the previous close.
Nomura analysts have gone on record to explain the basis for their rating revision. They attribute the reduction in the merged entity's book value primarily to adjustments related to Indian Generally Accepted Accounting Principles (IGAAP) and provisioning harmonization. This adjustment amounts to a substantial cut of Rs 23 per share in the book value for the merged entity. Consequently, Nomura has revised its target price for HDFC Bank, lowering it from Rs 1,920 to Rs 1,800. This target price still indicates a potential upside of 10 percent from the closing price of HDFC Bank on September 18.
However, the challenges for HDFC Bank don't stop at the book value adjustment. Nomura has also expressed concerns regarding the bank's net interest margins (NIM) in the coming quarters. The excess liquidity carried over after the merger is expected to exert pressure on NIM over the next two to three quarters. HDFC Ltd, the merged entity, has reported Q2FY24 opening book NIMs at 2 percent, a decline from the 2.7 percent recorded in Q1. This decline is largely attributed to the excess liquidity post-merger.
As a result of these concerns, Nomura has made further adjustments to its estimates. They have lowered their net NIM estimates by 25 basis points for FY24 and 15-20 basis points for FY25-26F. Moreover, the cost-to-income estimate has been revised upward to 40 percent for FY24F, compared to the previous estimate of 36 percent.
In conclusion, the aftermath of the HDFC Bank merger has brought about significant challenges, including a reduction in book value and concerns about net interest margins. Nomura's downgrade to a 'Neutral' rating reflects these uncertainties. While there is still potential for growth in the bank's stock, it will likely take time for the dust to settle and for investors to regain confidence in the merged entity's financial stability and performance.
