MUMBAI : The shares of HDFC Bank are expected to face some pressure in the short term due to its merger with housing finance giant HDFC, but the medium and long-term prospects of the private lender are ‘extremely bright’.
The bank will need to increase its Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by Rs 70,000 crore and meet priority sector lending requirements, which may put pressure on its profitability in the short term. However, shareholders of the new HDFC Bank will benefit from strong growth the lender from high credit and deposit growth, increased geographic reach and cross-selling opportunities, say analysts.
“The long-term prospects of the new HDFC Bank are extremely bright and that warrants share prices to move further, but there are few very short-term concerns. The first one is the reduction of holdings by mutual funds in the bank. Currently, the maximum limit of investment for a mutual fund is 10 per cent. Many funds have recently lowered their holding in HDFC Bank as their investments in the new entity moved beyond 10 per cent limit,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services told TNIE. “Mortgage lender HDFC was not subjected to reserve requirement set by the RBI. After the merger, the new entity will have to increase its CRR and SLR by Rs 70,000 crore which will impact the bank’s profitability. All these factors will act as a drag in the short run,” he said.
In the medium and long term, the bank will benefit from India’s rapid economic growth by meeting the country’s high demand for credit and financial services. HDFC was merged with its subsidiary HDFC Bank on July 1 after which shares of the mortgage lender were delisted from exchanges from July 12. HDFC Bank on Friday allocated over 311 crore new shares of the bank to shareholders of merged entity HDFC Ltd. The share allocation was done as per the swap ratio announced as part of the composite scheme of amalgamation.
As per the scheme, every HDFC shareholder has got 42 shares of HDFC Bank for every 25 shares they hold. Terming the merger as positive from a medium-term perspective, global financial services firm JP Morgan has assigned an ‘overweight’ rating on the stock. “Following a period of restriction, we are moving to an ‘overweight’ rating and a March 2024 target price of Rs 2,000 from a ‘not rated’ designation. We believe the merger with parent HDFC is positive from a medium-term perspective, given opportunity for liability refinancing, cross-sell, addition of book duration and lower share of unsecured loans,” said Saurabh Kumar of JPMorgan in a report.