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HDFC Bank, at its Analyst Day, disclosed details regarding the opening balance sheet of the merged entity along with other details on the merged financials. The incoming networth of HDFC Ltd will stand at INR1.11tn (against INR1.34tn as of Mar-23 i.e. lower by 16%) led by impact of multiple factors: a) provisions b) IGAAP alignment c) tax-related adjustments and d) dividend payout. In addition, given the large excess liquidity build-up in the run up to the merger, the incoming NIM of HDFC Ltd stood at 2% (vs 2.7% for 1QFY24) and this could drag down the merged entity’s margins by 25-30bps in the near-term and will recover gradually over the next 2-3 quarters. Additionally, merged entity on an opening basis will see 20bps increase in GNPL given that HDFC’s wholesale portfolio has seen asset quality deterioration (GNPL at 6.7% vs 2.9% in Mar-23) as per bank’s review. Provisioning alignment also entails the bank raising PCR on GNPLs from 42% to 74% on GNPLs which has been adjusted through the opening networth of the merged entity. As we incorporate these details into our estimates, our “below consensus” FY24/FY25e EPS have been slightly tweaked (1-2% change) while we adjust our BVPS expectations lower given the lower opening networth of HDFC Ltd. Maintain BUY with a target price of INR1850 (values the bank at 2.5x FY25e P/BV).

* HDFC’s incoming networth to be lower by 16% over Mar-23: As per the mgmt., HDFC’s opening networth will see impact of multiple factors which include a) harmonization of provisioning policy b) tax-related adjustments c) accounting alignment and d) dividend payout. As a result, HDFC Ltd’s opening networth will be lower by ~16% over Mar-23 levels. Standalone BVPS of HDFC Bank will stand at INR519 post-merger vs INR525 premerger as on 1st July 2023. The provisioning alignment is an outcome of increased GNPLs in HDFC Ltd’s wholesale book (primarily from stage-2 assets) and HDFC Bank choosing to raise coverage on GNPLs to 74% (same as bank vs 42% for erstwhile HDFC). GNPLs of the merged entity will stand at 1.4% (vs 1.2% for the bank earlier).

*Lower NIMs near-term; to improve gradually: Given the large liquidity build-up in run up to the merger, incoming NIMs of HDFC Ltd stood at 2% (vs 2.7% reported for 1QFY24 by HDFC). The combined entity began the journey with LCR of 125% (vs HDFC’s <115% level in a BAU basis). Mgmt indicated that it will take 2-3 quarters to run down the excess liquidity and NIMs will recover gradually from the depressed levels. We expect HDFC Bank’s NIM to dip to ~3.6% in 2QFY24 given impact of excess liquidity and I-CRR. Mgmt indicated that they continue to focus on retail deposit build up at the right price and expect to see traction ahead. Cost-income ratio of the merged entity is expected at ~40% (we had pencilled similar estimates earlier).

* Valuations and view: Given the adjustments to cost ratios and lower NIMs, we tweak our below consensus EPS estimates slightly (we had already built in higher opex). However given changes to the incoming networth, our BVPS estimates are reduced by ~3-4%. Maintain BUY with revised TP of INR1850.