HDFC Bank has dropped 26% following the news of the merger with HDFC
Slower-than-expected credit growth amid weaker macros as a result of the Ukraine-Russia crisis, as well as more margin softening as a result of slower retail credit growth, are important risks, according to experts.
admin
In intra-day trade on Thursday, HDFC Bank shares reached a new 52-week low of Rs 1,282.35, down 2% on the BSE. Since the news of its merger with housing financing giant HDFC Ltd, the stock has dropped 26%. In intraday session on April 4, 2022, the stock reached a high of Rs 1,721.85. Furthermore, on October 18, 2021, it reached a 52-week high of Rs 1,724.30.
HDFC and HDFC Bank announced on April 4 that both boards of directors had approved an all-stock merger of the former with the latter, subject to regulatory approvals. HDFC Ltd shareholders would receive 42 shares of the bank in exchange for their 25 shares. HDFC Ltd's subsidiaries and associates will become HDFC Bank subsidiaries and associates.
The entire process will take 15-18 months, including securing permissions from HDFC and HDFC Bank shareholders, the Reserve Bank of India (RBI), stock exchanges, the Securities and Exchange Board of India (Sebi), and other regulatory approvals. HDFC Ltd and HDFC Bank will operate as independent businesses till all approvals are in place.
Keki Mistry, vice chairman and chief executive officer (CEO) of HDFC Ltd, stated last month at The Economic Times' India Economic Conclave 2022, "The stock market's drop in the Dow is only temporary. We were unable to communicate the HDFC merger in a clear and articulate manner since earnings were due ".
"In terms of the merger, the bank/HDFC will have time (2-3 years) to create buffers in both organisations to mitigate regulatory pressure, albeit at the expense of margins in the interim. We lowered FY23-24E earnings by 2-3% due to lower NIMs and higher opex, and estimate average sustainable RoE to decline to about 17% from around 17.6% "in HDFC Bank's March quarter results update, analysts at Emkay Global Financial Service stated.
Slower-than-expected credit growth amid weakening macros as a result of the Ukraine-Russia conflict; further softening in margins as a result of slower retail credit growth/regulatory buffer built up in the run-up to the merger; and a delay in receiving regulatory approval for HDFC's proposed merger are all key risks, according to the brokerage firm.
"According to the bank, the combination will be EPS accretive from the first year. While the synergies appear appealing, we believe there are several challenges, including the impact of the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), and Priority Sector Lending (PSL) compliance cost – although the management believes it will be lower than previously anticipated and that the overall merger benefit should be greater than the regulatory cost, the RBI's aversion to banks holding significant stakes in para-banking businesses will be a major concern, "Nirmal Bang Equities has added analysts.
Meanwhile, HDFC's stock fell 3% to Rs 2,127.60 on the BSE today in intraday trading. They have lost 25% of their value after reaching a peak of Rs 2,855.35 on April 4th. On March 8, 2022, the stock hit a 52-week low of Rs 2,046.30.
