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HDFC Bank merger fosters near term caution but analysts stay upbeat

September 26, 2023

HDFC Bank merger fosters near term caution but analysts stay upbeat
HDFC Bank’s share price has fallen more than six percent in the last three sessions since the company’s analyst meet to share the details of the HDFC merger, due to near-term concerns on asset quality, excess liquidity, and net worth. While brokerages largely remain bullish and have favorable calls on HDFC Bank stock, they advise caution in the near term, with some even cutting the target price.

Brokerages highlighted a decline in HDFC Bank’s standalone book value due to accounting changes and near-term pressure on net interest margins on the back of a hike in incremental cash reserve ratio to tackle excess liquidity and elevated competition as overhangs for the lenders. On September 22, HDFC Bank stock ended at ₹1,530, down 1.5 percent from the previous close.
 
Brokerage firms note a potential impact on asset quality metrics, including an increase in non-performing loans (NPLs) from ex-HDFC’s real estate portfolio. Earnings estimates and Net Interest Margins (NIMs) are expected to be affected by factors, such as Interest on Cash Reserve Ratio (ICRR) and excess liquidity.
 
The merger with HDFC is anticipated to result in changes to net worth, with one-time adjustments noted by multiple firms. However, these adjustments are often described as timing differences or transitional. While there may be some weakening of Book Value Per Share (BVPS), most of it is considered non-cash and transitional in nature.
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