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2QFY24 to mark a weak start; RoE to revert to pre-merge levels by FY26E

HDFC Bank management at its analyst meet highlighted the baseline net worth, margins, asset quality and other key metrics of the merged entity. Following are the key takeaways from the meeting –

* HDFC Ltd’s net worth declined to INR1.12t in Jul’23 from INR1.34t as of Mar’23 due to accounting changes from IND-AS to IGAAP, credit policy harmonization, DTL reserve and other factors.

* The huge liquidity build-up at HDFC Ltd affected margins by 70bp to 2.0% as of Day-0 of the merged entity. The management highlighted that this implies a margin hit of 20-25bp on the pro forma merged entity estimates of 3.7-3.8%. As a result, we lower our NII estimates.

* The merged entity’s opening loans and advances stood at INR22.2t as of 1st Jul’23 and we estimate the same to grow by 12% over the remaining 9MFY24 and then at a 17% CAGR in the upcoming years.

* Asset quality ratios have deteriorated after the merger, with the GNPA ratio increasing to 1.4% from 1.2% and the NNPA ratio rising to 0.4% from 0.3% for the standalone bank. PCR will be broadly stable at 74% (75% for standalone HDFC Bank).

* The pro forma merged entity’s RoA/RoE sustained at 1.9%-2.0%/16% in 1QFY24; however, 2QFY24 appears to be a weak quarter with subdued margins and elevated cost ratios (pro forma merged at 40% for 1QFY24). We reduce our PAT/BV estimates by ~5%/~3% and lower our PT to INR1,950 (2.7x FY25E ABV + INR206 from subs).  

HDFC Ltd net worth moderates on methodology change, other factors

The management highlighted that erstwhile HDFC Ltd’s (e-HDFC) net worth, which stood at INR1.34t as of Mar’23 as per IND-AS, has moderated to INR1.12t as of 1st Jul’23 under IGAAP. It incorporates the impact of methodology alignment to IGAAP from IND-AS (INR 118b), credit policy harmonization (INR76b), deferred tax liability reserve (INR49b) and interim dividends (INR81b). HDFC Bank’s net worth thus will increase from the opening figure of INR2.94t as of 1st Jul’23 to INR3.91t on merged basis as of 1st Jul’23. The standalone bank’s BVPS moves from INR525 as of 1st Jul’23 to INR519 on the merged basis.

Loan growth to remain in check; estimate ~12% growth over residual 9MFY24 and 17% CAGR thereafter

We estimate loan growth for the merged entity to sustain at 12% over the remaining 9MFY24, while the CAGR will recover to 17% over FY24-26E. The continued rundown in wholesale book of e-HDFC Ltd and slower growth in the individual mortgage business will drag down overall loan growth. The bank has indicated that the merged entity’s balance sheet size was INR32.5t as of 1st Jul’23 and we estimate it to grow to ~INR49t by FY26E. 

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