Lower book value, asset quality pain & high costs: Nomura downgrades HDFC Bank in merger aftermath

Citi has maintained its Buy rating on HDFC Bank, although it has revised its target price down to Rs 2,110 per share

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26 Aug, 2025 12:21

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Foreign broking firm Nomura has downgraded its rating on HDFC Bank to Neutral after the country's largest private-sector bank held an analyst call to share particulars of the merged entity. Due to accounting adjustments, the combined entity's book value will be lower than HDFC Bank's standalone book value and that has led to several brokerages cutting their targets on the stock.

Book value is essentially the value of a company's total assets minus its total liabilities. At 9:30 am, HDFC Bank stock was quoting at Rs 1,578.05, down 3.13 percent from previous close.

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"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.

They have cut target price for HDFC Bank to Rs 1,800 from Rs 1,920 earlier. The current target price indicates 10 percent upside from HDFC Bank's closing price on September 18.

The broking firm further said that net interest margins (NIM) could see pressure over the next two to three quarters as HDFC Ltd's Q2FY24 opening book NIMs are at 2 percent versus 2.7 percent in Q1. This is mainly on account of excess liquidity being carried post-merger.

On 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. It has also bumped up a cost-to-income estimate to 40 percent in FY24F versus 36 percent previously.

"Our FY24F earnings per share has been cut 9 percent, with ~5 percent cuts in FY25-26F. Our FY24 return on assets estimate is now at 1.7 percent versus 1.9 percent earlier, gradually improving to 1.8 percent in FY25-26F," Nomura said.

Have other brokerages downgraded too?

Citi has maintained its Buy rating on HDFC Bank, although it has revised its target price down to Rs 2,110 per share. It noted that the entity's non-individual NPA (non performing assets) have been reset to 6.7 percent in June from 3.7 percent in March. A sharp uptick in NPAs due to HDFC Ltd’s corporate loan book is a negative, it added.

Jefferies has also maintained its "Buy" rating on HDFC Bank but has lowered target price to Rs 2,030 per share. The firm has noted that non-performing loans (NPLs) of HDFC Ltd are higher, which now form a big part of the merged entity.

"HDFC Bank now trades at 2.5x 1-year forward book value per share(adjusting for subsidiaries), which is similar to ICICI Bank despite a comparatively lower loan growth and RoA outlook," said Nomura.

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