Foreign institutional investors currently hold 59 percent stake in HDFC Bank, leaving a headroom of about 20 percent, said Nuvama Institutional Equities after analysing the bank's September quarter shareholding pattern. However, there is still some way to go before the stock's weight can double on MSCI index.
The headroom is up from 18.3 percent in June 2023, when FIIs held 60.3 percent, it added. 'Foreign room' is essentially the proportion of shares still available to foreign investors relative to the maximum allowed. The foreign investment limit in privately held banks is at 74 percent currently.
The higher the headroom or lesser the foreign holding, the greater the chance of increased weightage in MSCI.
According to the current MSCI methodology, a stock's weight can double if the foreign headroom exceeds 25 percent.
"Thus, more selling by FIIs is needed in the next few quarters before MSCI incorporates the merged (HDFC + HDFC Bank) shares with a factor of 1, compared to the 0.5 currently used," said Abhilash Pagaria of Nuvama Alternative & Quantitative Research.
Also Read: HDFC Bank Q2 update: Advances jump 57%, home loan grows 10% post merger
The country's biggest private lender HDFC Bank had replaced Housing Development Finance Corp (HDFC) Ltd, on the MSCI Global Standard indices on July 13, following the merger of the two companies.
While weightage increase in MSCI will be keenly monitored going ahead, FTSE has already announced an increase in weight in three tranches. "The first tranche has occurred, and the next two rebalances are set for December 2023 and March 2024, bringing in around $500 million each time," Pagaria said.
Meanwhile, foreign broking firms believe that merger pain will last a while for HDFC Bank. In September, Nomura downgraded its rating on HDFC Bank to Neutral because the combined entity's book value is now lower than HDFC Bank's standalone book value.
"Downward adjustment to the incoming net worth of HDFC Ltd (largely due to IGAAP accounting and provisioning harmonization) amounts to a book value per share cut of Rs 23 per share for the merged entity," said analysts at Nomura.
The broking firm further said that net interest margins (NIM) could see pressure over the next two to three quarters, mainly on account of excess liquidity being carried post-merger.
On the back of this, Nomura has cut its net NIM estimates by 25 basis points in FY24 and 15-20 bps in FY25-26F. One basis point is one-hundredth of a percentage point.
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