HDFC Bank's share price shed nearly 5 percent on Monday after the company declared its fourth-quarter numbers last week. The private sector lender reported a 23 percent year-on-year (YoY) growth in standalone net profit at ₹10,055.2 in Q4FY22 as bad loans provisions declined and asset quality improved.
Its standalone profit stood at ₹8,186.51 crore in the same period last year. Net interest income (NII), the difference between interest earned and interest expended, also increased 10.2 percent YoY to ₹18,872.7 crore in Q4.
The stock fell as much as 4.7 percent to its day's low of ₹1,396 per share on BSE. The stock has lost over 5 percent in 2022 YTD and risen just 2 percent in the last 1 year.
Earlier this month (on April 4), HDFC Bank announced that its board has approved the amalgamation of HDFC Investments and HDFC Holdings with HDFC and that of HDFC into HDFC Bank. The merger is expected to be completed by the second or third quarter of FY24. After the merger, HDFC Bank will be 100 percent owned by public shareholders and existing shareholders of HDFC Limited will own 41 percent of HDFC Bank. Before the merger was announced on April 4, the stock of HDFC Bank closed at ₹1,506 on Friday (April 1, 2022). on the day of the announcement, the stock surged 10 percent to ₹1,656.80.
However, since then, the stock has given up all its merger gains to fall over 16 percent to hit today's intra-day low of ₹1,396 per share on BSE.
However, it seems like recovery is on the way for the private sector lender.
Broking firm Emkay Global expects the firm to rise around 37 percent in the next 12 months. It has a 12-month target price of ₹1,950 for the stock post its Q4 earnings. Meanwhile, IDBI Capital has a target price of ₹2,020 for the stock, indicating an upside of over 44 percent in 12 months.
According to Emkay Global, despite sector-leading credit growth (21 percent YoY), HDFC Bank reported a slight miss on the profit front in the fourth quarter due to continued weak core profitability, which was dragged by weak margins/fees and additional contingent provisions.
It added retail credit growth lagged overall credit growth with the share of retail down to 45 percent, thus weighing on core margins.
"Management argues that the focus is on risk-adjusted margins, which have improved QoQ to 3.5 percent from 3.1 percent. It expects retail growth to improve, driven by unsecured loans, providing some support to margins. However, we believe that the rising share of mortgages/higher fixed-rate loan book could keep margins in check in the near term," Emkay Global has said in its report.
IDBI Capital also stated that HDFC Bank reported an improvement in credit growth to 20.8 percent YoY versus 14.0 percent YoY (Q4FY21) supported by a rise in commercial and rural loan growth. Recoveries and upgrades during the quarter were around ₹2,100 crore, it added.
Asset quality further improved with Gross NPA at 1.17 percent versus 1.26 percent QoQ led by lower slippages, further noted IDBI. The provision also declined by 29.4 percent YoY resulting in low credit cost at 0.97 percent vs 0.95 percent in Q3 FY22, it added.
Outlook and Risks
As per the brokerage, lifting of the RBI's restrictions on the card/digital initiatives plan to re-accelerate retail credit growth and focus on risk-adjusted margins should be long-term positives.
"As far as the merger is concerned, the bank will have time (2-3 years) to moderate regulatory drag by building buffers in both entities, but at the cost of margins in the interim," it said.
Factoring in lower NIMs/higher opex, it cut FY23-24E earnings by 2-3 percent and expects average sustainable RoE to moderate to 17 percent from 17.6 percent earlier. It retains a long-term 'buy' on the stock given the recent correction.
Meanwhile, IDBI Capital believes HDFC Bank will gain market share led by a strong leadership position across segments, large distribution, digital focus, and strong capital adequacy. It remains structurally positive on HDFC Bank given its superior credit underwriting, structurally better NIM and the ability to maintain a higher return on asset among its peers.
Key risks are slower-than-expected credit growth amid weakening macros due to the Ukraine-Russia conflict; further softness in margins due to slower retail credit growth/regulatory buffer built up in the run-up to the merger, and delay in getting regulatory approval for the proposed merger of HDFC, added Emkay.