HDFC Bank Q2 marred by merger, margin recovery on cards: Should you buy or sell the stock?

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HDFC Bank, India's largest private sector lender, reported mixed results for the first quarter following the merger with HDFC Ltd. Although the bank reported that its net profit surged 50 percent over the last year, its core business growth was weighed down by lower-than-expected net interest margins (NIMs) and net interest income (NII).

Despite the recent underperformance, brokerages remained bullish on the HDFC Bank stock as they expect sequential improvement in core earnings momentum and NIMs recovery. As the impact of ICRR (incremental cash reserve ratio) and surplus liquidity will recede, expansion will be seen from the fourth quarter.

Q2 earnings encouraging

HDFC Bank's growth in net interest income (NII) is expected to reaccelerate from here on, noted Morgan Stanley. The international brokerage issued a 'buy' rating on the stock with a target price of Rs 2,100 per share. The lenders' retail deposit accretion at over Rs 90,000 crore is encouraging. However, going forward, sustenance of this momentum will be key.

Foreign research firm HSBC has cut the target price to Rs 1,850, while maintaining its 'buy' call on the HDFC Bank stock. “HDFC bank faces tough deliverables,” it said. Analysts said that most of the low-hanging fruits have been plucked, and only consistent execution can pull it through. Improving NIMs and narrowing its performance gap with ICICI Bank is critical, it added. "HDFC Bank's risk-to-reward ratio is favourable,” HSBC said.

Also Read | HDFC Bank Q2 earnings: Net profit rises 50% to Rs 15,976 crore

NIM pressure to persist

Incred Equities expects HDFC Bank to see healthy growth in advances after the merger. It expects margin pressure to persist in the second half of this fiscal on account of excess liquidity and elevated cost of deposits. "Offsetting lower credit costs amid rapid branch expansion drives growth certainty," said Incred, while issuing an 'add' call on the counter with a target price of Rs 2,000 per share.

The current valuation of HDFC Bank adequately captures the merger-related pangs, and should alleviate concerns regarding compression of return on assets (RoA) over the medium-term, according to analysts. As the world's seventh largest bank's liabilities momentum sustains, JM Financial expects the stock to reverse its recent underperformance.

"Current valuations offer attractive risk-reward for a high quality, diversified asset franchise with superior through-cycle asset quality performance," the brokerage said, putting a 'buy' tag on the stock with a target price of Rs 1,850.

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Valuations reasonable

HDFC Bank's earnings growth is seen in the mid-teens, said Jefferies. It expects return on equity (ROE) at 17 percent from FY25, aided by healthy deposit growth. The brokerage says that the bank’s valuations are reasonable at a price/ adjusted book value of 2.2x on a 12-month forward basis. "After having emerged as the 7th largest bank in the world HDFC Bank now looks attractive for global portfolios as well," it said.

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