Target: 1,900

CMP: ₹1,531.70

HDFC Bank shared details on the merged performance, which provided initial insights into how the numbers would stake up in the near term. Given the adjustments related to higher-than-expected cost ratio and lower NIMs, RoA compression in the near term is likely and the bank is expected to report RoA of about 1.8 per cent in FY2024/2025.

NIMs for the merged entity were at 3.7-3.8 per cent (in line with expectations) in Q1FY2024. However, given the excess liquidity buffer required, starting NIMs for HDFC are at 2 per cent vs. 2.7 per cent in Q1-FY2024. This could further drag down NIMs for the merged entity by 20-25bps in the near term.

NIMs are expected to recover gradually in the coming quarters. Cost-income ratio of the merged entity is expected at about 40 per cent. Additionally, there has been one- time downward adjustment done to erstwhile HDFC net worth related to – restatement from Ind-AS to Indian GAAP accounting; incremental provisions resulting in higher coverage; tax-related adjustments; and dividend payments.

Thus, we have tweaked BVPS estimates lower due to one-time net worth adjustment and earnings estimates tweaked lower for FY2024/FY2025 due to lower NIMs and higher-than-expected cost ratio due to the merger.

We maintain our Buy rating with a revised PT of ₹1,900, as the probability of further earnings downgrade.