What is ailing the HDFC Bank scrip?

The counter of HDFC Bank has been abuzz throughout the month of April 2022. The month started with the mega news of merger of its parent — HDFC with the bank. This deal was long overdue and entails several benefits for both the companies. Prominent merger benefits include the large scale of the combined entity and unmatched cross-selling opportunities for the bank. With growing economies of scale, the combined entity’s operating costs could trend south over the medium to long term. Not surprisingly, this news created euphoria in the markets with the HDFC Bank scrip surging 10% on April 4, 2022 — when the merger was announced. Readers must note that most HDFC group stocks were trading in the red before the merger announcement, as foreign investors continued to trim their holdings citing high valuations. HDFC Bank, in particular, struggled with issues around its digital products and more importantly, life after exit of veteran banker Aditya Puri.

The enthusiasm around the merger, though, seemed to be short-lived. The stock has been on a continuous downtrend since April 5. In fact, it has nosedived nearly 19% from the highs of Rs 1,656.45 seen on April 4 to Rs1,343.3 on April 19. In other words, the HDFC Bank scrip has not only wiped out the sharp gains witnessed post announcement of the merger, but is reeling under sustained downside pressure.

So, what is ailing the HDFC Bank scrip?

This pain can be attributed to a few important factors. Over the past few sessions, market participants have been dissecting the merger details bit by bit, with unwavering focus to unravel all its facets. It is now pretty clear that merger benefits are likely to bear fruit only during 2024-25. The road to reaping merger synergies is likely to be a long one with the bank seeking several regulatory clearances and undertaking integration of HDFC and its subsidiaries. Regulatory costs associated with the merger (maintaining CRR, SLR levels, for instance) would have a notable bearing on the bank’s profitability over the next couple of years. Additionally, any hiccup at either of these stages could delay fructification of merger synergies.

Second, the bank’s results for March 2022 quarter (announced on April 16) failed to impress investors. Its performance on two key metrics, namely, net interest income and profit after tax lagged street estimates by a huge margin, prompting several analysts to trim their earnings estimates as well as target prices on the bank. Growth in core pre-provisioning operating profit was slowest-ever and fell short of the bank’s loan growth.

In this scenario, voices around the bank’s ability to sustain industry-leading growth as well as return ratios post the merger have grown louder.

It is not surprising then that some investors now prefer some of the closest peers of HDFC Bank, citing higher growth prospects in the next 2-3 years. While near-term pressures persist for HDFC Bank, all eyes will now be on how soon it can surpass these and drive its long-term prospects.

The author of this article is Sheetal Agarwal, AVP- Content and Communication, IIFL