HDFC Bank gains 1.5% after LIC gets nod to raise stake

• LIC received government nod to increase stake in HDFC Bank to 9.9%.
• This is a positive trigger for the stock which has lost over 15% in the last two weeks.
• Analysts believe that ‘costs’ of the merger will play out in interim with long-term benefits ahead.

HDFC Bank traded in the green on Monday, after LIC received a nod from the government to raise stake in it to 9.9%. India’s largest insurer will have to shell out over ₹50,000 crore to raise its stake by an additional 4.8%. It’s expected to do the same gradually.

The stock of HDFC Bank has been trading around its decadal lows, after the merged balance sheet threw up surprises in the third quarter. On Monday, it gained 1.5% higher to close at ₹1,457.

“LIC getting RBI approval to raise their stake in HDFC Bank is positive for the latter,” said Dr V K Vijayakumar, chief investment strategist, Geojit Financial Services.

The sharp change in its loan to deposit ratio (LDR) to a tight 110% post-merger had spooked the markets. Its pre-merger LDR was anywhere between 85-89%. Ever since it announced its Q3 earnings report on January 16, the stock lost 15.4% of its value. The index heavyweight had also caused a widespread crash of banks’ stocks, but a few of them have recovered since.

Bears to bulls ratio

Analysts believe that HDFC Bank will have to grow its deposits 3-4% higher than credit growth – to get its LDR back to pre-merger levels. The management said that will happen over 3-4 years.

A few experts are of the opinion that its recent sharp fall is a good opportunity to buy into the stock. “Among the foreign investors, the ratio of ‘bears’ to ‘bulls’ seemed much lower than the domestic investors. Many of them believe that the worst is almost over, and we should see an improving trend across all important parameters. Moreover, some pointed out that the Street is missing out on the merger synergy benefits that are yet to play out,” CLSA said after interacting with twenty of its clients who had concerns around its net interest margin and deposit growth.

HDFC merged with HDFC Bank as of July last year. The benefits which created a mammoth institution will see interim pressures, but there are benefits on the horizon. “As the merger benefits accrue over a period, the intermittent period will see merger-related costs in the form of pressure on margins and cost to income ratio. The return on equity is expected to moderate in near terms owing to low leverage of the parent, however we expect return on assets (RoA) to sustain at 1.8-1.9% level,” said Phillips Capital.