Shares of HDFC Bank fell 6.5 per cent this week; here's why

The second largest decline in HDFC Bank’s share price this year occurred yesterday, following the one in May 2023, with a drop of 5.9 per cent on this specific day.

HDFC Bank, the largest private lender, fell by around 6.5 per cent this week. The shares began trading at Rs 1655 each, which was 0.41 per cent down from its previous closing price of Rs 1661.90 each.

In the current week, the high and low prices are Rs 1655 and Rs 1538, while today it closed at Rs 1553.60 on the BSE. The biggest fall in HDFC shares this year occurred on May 05, 2023, when it fell approximately 5.91 per cent in a day and closed at Rs 1625.65 on that day. 

In terms of market capitalization, it lost approximately Rs 49,355 crore yesterday the second biggest decline, from Rs 12,34,104 crore to Rs 11,84,749 crore. The current market capitalization of HDFC Bank is Rs 11,76,946 crore.

So, coming to our moot question, why did the stock fall?  

The answer is that HDFC Bank organized an analyst meeting on Monday and during its meeting, HDFC Bank pointed out the possibility of a short-term worsening of net interest margin (NIM), net worth, and asset quality following its merger with its parent company, Housing Development Finance Corporation. 

Net Interest Margins 

At the meeting, analysts cited Chief Financial Officer Srinivasan Vaidyanathan as saying that the NIMs may narrow by 25 basis points (bps) due to the combined impact of the incremental Cash Reserve Ratio (CRR) and excess liquidity.  

Net Worth 

Vaidyanathan also mentioned a one-time hit of Rs 20,000 crore due to an erosion in HDFC limited net worth, attributed to one-off charges such as deferred tax liability, the impact of incremental cash reserve ratio, and alignment with the new Indian accounting standards. 

According to an investor presentation on its website, HDFC's net worth, which previously stood at Rs 1.340 billion as of March 31, 2023, will now be lower, at Rs 1118 billion as of July 1, under the IGAAP financial reporting standards following its merger with the bank. 

Asset Quality 

Furthermore, the bank is likely to see a marginal worsening of its bad loan ratios after the merger with HDFC Ltd., the bank is expected to experience an increase in its GNPA ratio to 1.4 per cent as of July 1, compared to 1.2 per cent as of June 30 as per Vaidyanathan, during a discussion. In a presentation, the bank also mentioned that the net NPA ratio will rise to 0.4 per cent from 0.3 per cent at the end of the first quarter. 

The increase in bad loans can be attributed to HDFC's non-individual housing loan portfolio, which reported a gross bad loan ratio of 6.7 per cent as of July 1st. There are certain non-individual accounts that the bank’s risk assessment is not comfortable holding, he said. 

As of March 31, HDFC had a total loan portfolio exceeding Rs 6 lakh crore, comprising Rs 4.99 lakh crore in retail loans and Rs 1.15 lakh crore in loans extended to corporate entities. The bank has maintained sufficient provisions for these loans, according to the bank's CFO. 

As of July 1, the provision coverage ratio for the merged entity stands at 74 per cent, compared to 75 per cent as of June 30. At present, the non-individual loan portfolio is in a state of reduction, and it is expected to take a few quarters before it stabilizes, as mentioned by Vaidyanathan. 

The combined loan portfolio now exceeds Rs 22 lakh crore, making it second only to the State Bank of India in terms of asset size. Some analysts express concerns that the expansion of the balance sheet could potentially prevent future growth. 

On July 1, the merger of the two entities occurred, resulting in the formation of the second-largest bank in India. 

Disclaimer: This article is for informational purposes only and not investment advice.