HDFC Bank, the largest private lender, fell by 4% today on the BSE. The shares began trading at Rs 1599 each, which was 1.84% down from its previous closing price of Rs 1629 each. It hit an intraday low of Rs 1560.60 and finally closed near its today’s low price at Rs 1563.90, which is exactly 4% down from its previous closing price. The biggest fall in HDFC shares this year occurred on May 05, 2023, when it fell approximately 5.91% in a day and closed at Rs 1625.65 on that day.
In terms of market capitalization, it fell approximately Rs 49,355 crore today, from Rs 12,34,104 crore to Rs 11,84,749 crore in a day.
The most important question here is why it fell so much and what happened to the stock as well as the company overnight.
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.
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.
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% as of July 1, compared to 1.2% 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% from 0.3% 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% 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%, compared to 75% 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 blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.