Informist, Thursday, Jan 18, 2024
By Apoorva Choubey and Akshata Gorde
MUMBAI – Once considered the best play in the Indian banking sector, HDFC Bank Ltd now finds itself facing the ire of equity investors as it struggles to mobilise deposits, expand branches, and grow high-yielding loans at a pace that can justify its premium valuations compared to most rivals.
Over The Last One Year, The Stock Is Down 8.4% Compared To A 7.6% Rise In The Nifty Bank Index
Shares of India's largest private lender crashed over 8% on Wednesday to end at 1,537.50 rupees, marking their steepest fall since the COVID-led crash in equities in March 2020. Wednesday's fall was triggered by its Oct-Dec earnings, which the bank detailed after market hours on Tuesday.
The fall has exacerbated the underperformance of the lender's shares to the Nifty Bank index over the last one year – the stock is down 8.4% for the period compared to a 7.6% rise in the banking index.
Even though the lender's net profit for the December quarter beat the Street's expectations and asset quality improved, the core net interest margin on total assets shrank 25 basis points on quarter to 3.4%. What the market finds worrisome is the fact that the core net interest margin contracted despite HDFC Bank deploying some excess liquidity and significantly lowering its liquidity coverage ratio to 110% from 121%, analysts say.
Margins have been subdued over the last two quarters also because of the merger of parent HDFC Ltd into HDFC Bank effective Jul 1, which has meant that the bank's loan book size has increased sharply and mortgages account for over 30% of the book. While home loan major HDFC brought a big loan book of more than 10 trln rupees to the merger, it did not bring along comparable deposits, as it was not a commercial bank.
As a result, the merged entity's total loan book rose sharply while deposits did not. Also, as most home loans are cheaper than commercial loans, the net margins for the merged entity would fall. Speaking about this, Chief Executive Officer Sashidhar Jagdishan had said that margins for the merged entity would fall to 3.7-4.0% from 4.0-4.5% for the bank prior to the merger.
For 2022-23 (Apr-Mar), HDFC Bank's total advances were 16 trln rupees, while deposits stood at 18.8 trln rupees. HDFC Ltd, on the other hand, had total assets of 10.9 trln rupees and deposits of 1.5 trln rupees.
When it comes to the December quarter results, other red flags for investors included the slower-than-guided rate of branch expansion as well as an unusually high loan-to-deposit ratio of 110%, they said. The lender's loans grew 4% on quarter, while deposits rose 2%.
"The bank has exhausted its LCR cushion and the LDR is too high at 110%," brokerage Nuvama Institutional Equities said in a report today, adding that the average quarterly net deposit growth for the nine months ended December stood at 636 bln rupees, much lower than the bank's guidance of 1 trln rupees.
With HDFC Bank guiding for slower expansion of branches, several analysts are also concerned that the bank may find it difficult to ramp up deposits at the required pace. The lender said it would add about 1,000 branches this financial year, lower than the earlier projected 1,400-1,500.
The lender has added only 270 branches in the nine months ended December compared with 840 in the same period a year ago, according to a Jefferies report.
"Hereon, the bank will have to grow deposits faster than loans," Nuvama Institutional said, reducing its earnings per share and loan growth estimates for the lender for the next two years by 4-6%. The brokerage also downgraded its rating on shares of the lender to 'hold' from 'buy', while cutting the price target by 40 rupees to 1,730 rupees.
Several other broking firms, including Jefferies, have also reduced their earnings estimates for the bank. Jefferies has trimmed its earnings estimates by 2-3%, but retained its 'buy' rating on the shares.
"While we have factored in some rise in NIMs from Apr-Jun, actual delivery will be key to addressing concerns," the brokerage firm said.
The reduction in earnings estimates was the trigger behind the massive rout in shares of the lender on Wednesday, with several equity dealers pointing to the possibility of big institutional holders paring their stake.
Volumes in the stock surged to 85 mln in the NSE's cash market, a nine-fold jump from the average daily volume seen in the counter. What's more, a whopping 63% of the shares traded in the cash market were taken for delivery, indicating that selling by long-term investors could have contributed to the fall, according to an independent market expert.
"We had expected the stock price to go down but did not expect such a sharp correction of 8.4%," said Kunaal N, an equity research associate at Emkay Global Financial Services Ltd.
"There might be some profit-booking, but I don't think it was just a small number of retail investors...There might've definitely been a big player or foreign institutional investor or mutual fund who has sold their stake here," he said.
The bank's shares, which have historically traded at a significant premium to the industry average, may now trade at a lower premium over its competitors, said a fund manager holding the stock, requesting anonymity.
As per FactSet Estimates, HDFC Bank's shares were trading at 19 times the price-to-earnings multiples for the current financial year, much higher than the range of 9-17 times that State Bank of India Ltd and ICICI Bank Ltd were commanding.
At 0950 IST, shares of the bank were 2.6% lower at 1,498 rupees on the National Stock Exchange.
Brokerage Elara Securities believes the stock may see "time correction" till investors find merit in the bank's delivery of growth. The brokerage said the recovery in HDFC Bank's net interest margins may take longer than earlier anticipated because of transitionary liquidity requirements, changing loan construct, and systemic challenges on deposits.
Yuvraj Choudhary, an equity research analyst at Anand Rathi Shares and Stock Brokers Ltd, agrees with this view. The scope for margin expansion looks tough in the near term as the lender first needs to lower credit costs, and it will take at least three-four quarters to solve this problem, he said.
SPILLOVER IMPACT
The sell-off in shares of HDFC Bank spilled over to the entire banking sector, prompting a 4% crash in the Nifty Bank index on Wednesday. The index ended at 46064.45 points, after suffering its sharpest fall in two years.
HDFC Bank's results, which showed levels of loan to deposit ratio far beyond the Reserve Bank of India's comfort levels, raised some doubts over the health of other banks too.
"This is the case with most other banks as well...Thus, the markets expect either margin pressure, in case banks go in for aggressive deposit mobilisation, a slowdown in lending growth, or both.." said Naveen Kulkarni, chief investment officer at the portfolio management services unit of Axis Securities.
Kulkarni warned that this development could actually lead to some de-rating for the entire sector.
Several market participants said that short positions have been added to the Nifty Bank's futures and long bets have been covered, as the short-term outlook looks volatile.
CONTRARIAN VIEW
Not everyone, however, is taking a negative view on this development.
Speaking to news channel ET Now on Wednesday, Marcellus Investment Managers' Saurabh Mukherjea said the current fall had brought down HDFC Bank's valuations to "mouth-watering" levels.
The bank is continuing to grow at 20?spite its scale, and once things stabilise, loan and deposit growth would recover to strong levels, Mukherjea said, adding that synergies from the merger with Housing Development Finance Corp were yet to flow into the bank's earnings.
Brokerage Motilal Oswal Securities estimates that HDFC Bank will deliver faster deposit growth at a compounded annual rate of 19%, while loan growth will sustain at 17% over the next three financial years. The brokerage has maintained its 'buy' rating on the stock with a price target of 1,950 rupees. End
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