Return ratios now even more starkly in favour of ICICI Bank compared to HDFC Bank
ICICI Bank’s RoA profile is at 2.2%, which is much superior to HDFCBank’s.
- Nomura has said that the sharp uptick in NPAs in HDFC Ltd’s corporate loan book is a negative surprise.
- Motilal Oswal says HDFC Bank took higher general and contingent provisions at ₹3,900 crore and specific NPA provisions of ₹3,800 crore to maintain the strength of the merged entity’s balance sheet.
Shares of HDFC Bank have corrected from ₹1,661 on September 15 to ₹1,537 per share after the bank broke some bad news to analysts last week. To keep matters simple, there’s the first big takeaway – the returns ratios are now even more starkly in favour of ICICI Bank. There are several negatives that will impact the bank’s financial ratios, following the merger with HDFC Limited. For starters, the return on assets for the merged bank in 1QFY24 on a pro-forma basis is 1.9-2% compared with 2.1% for the standalone bank, says Yes Securities.
Analysts have cut earnings per share estimates of the bank, following the details the management shared. Nomura has cut EPS estimates by 5-9% over the FY24-25. This in turn will depress medium term RoA profile further 1.7-1.8% over FY24-26. In contrast, ICICI Bank’s RoA profile is at 2.2%, which is much superior to HDFC Bank’s. Analysts say that the RoA gap between the RoA profile of both banks is even starker now. In addition, due to the increase in liquidity post the merger, the bank’s net interest margin will also decline by 25-35 basis points. It will take 2-4 quarters to bring down the extra liquidity.
There are other negatives too for HDFC Bank, after the merger. The adjustment to the bank’s net worth after the merger will have a negative 4% impact over FY24 on the book value per share (BVPS). What will also negatively impact the bank’s overall ratios is the bad loan book of HDFC. Nomura has said that the sharp uptick in NPAs in HDFC Ltd’s corporate loan book is a negative surprise. Not surprising that the Japanese investment bank has downgraded the stock to neutral and cut target price by 9% to ₹1,800 (from Rs 1,970). “While we fully appreciate the strength of the franchise, we struggle to see upside over the next 12 months on the back of RoA and loan growth pressures.”
The rise in the ratio of non-performing assets (NPA), following the merger, is also a key negative. After the merger has become effective from 1 July, HDFC Bank’s gross NPA ratio will rise to 1.4% from 1.2% before the merger, while net NPA ratio will rise from 0.3% to 0.4% (0.37%). As a consequence, the bank’s provision coverage ratio will decline from 75% to 74%. Contingent and floating provisions will remain stable at 0.7%. Total provisions have risen from 2.0% to 2.2% of advances.
HDFC Bank’s CEO Sashidhar Jagdishan has explained this deterioration in bad loan ratios to analysts. In an interaction with Motilal Oswal Financial Services, Jagdishan has said that the bank took higher general and contingent provisions at Rs 3900 crore and specific NPA provisions of Rs 3800 crore to maintain the strength of the merged entity’s balance sheet. These additional provisions do not reflect any change in the underlying asset quality, say analysts.
Additionally, HDFC Bank is looking to double the balance sheet in four years and believes that the loan growth momentum will sustain. Aggressive branch mobilisation will also help in garnering more low cost deposits. HDFC Bank’s top brass believes that the new branches are on track to meet business goals. The 500 branches of HDFC Limited will also be scaled up over the next one year.
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