HDFC Bank gains for second session after recent correction; risk-reward turns favourable

HDFC BANK

Shares of HDFC Bank Ltd gained for the second session after falling over 9 percent in the last three weeks. The stock was under pressure recently amid continuous selling by foreign investors and expectations of a near-term decline in net interest margin (NIM), net worth, and asset quality after merging with parent company Housing Development Finance Corp. (HDFC).

On Wednesday, the stock closed over 1 percent higher while on Thursday at 9.30am, the stock was trading at Rs 1540 on BSE, up 0.6 percent from its previous close.

Meanwhile after this correction analysts consider it to be trading at attractive valuations and believe it offers a favorable risk-reward for long-term investors.

Read: Foreign investors continue to reduce stake in HDFC Bank; can stock's weight double on MSCI?

In a recent investor call HDFC Bank's CFO, Srinivasan Vaidyanathan, noted a potential 25 basis point NIM contraction due to increased CRR and excess liquidity post-merger. This could result in lower earnings for the bank in the second quarter, with the merged entity's margin estimated at 3.7-3.8% in June 2023, down from the bank's previous standalone margin of 4.1%. Analysts, including Macquarie, suggest this may affect the bank's near-term return on assets (RoA).

The shareholding of foreign investors slipped nearly 130 basis points to 59 percent during the September quarter. This has increased the FII investment legroom in the stock to 20.3 percent of the available limit of 74 percent. A note by Nuvama Alternative said if the FII investment legroom in HDFC Bank increases to 25 percent, the stock's weighting in the MSCI Indices could be doubled. The move could lead to significant inflows from passive trackers.

Read: HDFC Bank Q2 update: Advances jump 57%, home loan grows 10% post merger

Meanwhile, in the September quarter, HDFC Bank disbursed home loans totaling Rs 48,000 crore, showing a 14 percent sequential growth and a 10.5 percent increase compared to the same period last year. This quarter was the bank's first after merging with HDFC Ltd, and its retail loan book surged by 85 percent from the previous quarter and 111.5 percent from the same period last year.

Additionally, the bank's gross advances increased by Rs 1.1 trillion to reach Rs 23.5 trillion in the second quarter, marking a 5 percent rise over the proforma merged advances of Rs 22.4 trillion as of June 30, 2023. Deposits also grew by Rs 1.1 trillion, reaching Rs 21.7 billion, reflecting a growth of approximately 5.3 percent over the proforma merged deposits of Rs 20.6 trillion as of June 30, 2023.