hdfc: HDFC Bank stock may react positively on any management commentary on merger: Aditya Shah


“Last two quarters, agri loans were a bit of a problem, so we need to wait for the management to tell us how the agri loans are really performing,” says Aditya Shah, JST Investments.

Your first take on the numbers, the NII as well as profitability is a smidge below the sweet estimates, but the asset quality continues to improve.

Definitely, a very good set of numbers. There is nothing to complain about as such. After the operational performance released in the press release, all eyes were on the asset quality. The asset quality has panned out pretty steady. There is nothing to complain about there. The slippages number will need to be seen. It could be somewhere around Rs 6,000 to 7,000 crores. But, overall, there is no problem as such. Last two quarters, agri loans were a bit of a problem, so we need to wait for the management to tell us how the agri loans are really performing.

But, given the fact that the numbers are broadly in line with what the Street was expecting, you are not expecting a big upgrade or downgrade to the first cut of numbers that we have with us?
Yes, absolutely, the numbers were pretty expected, but the major driver for the HDFC and HDFC Bank stock continues to be in the near term- merger update and we need to wait for the management to update us what is going to happen with the regulatory compliance that they have given to the RBI regarding SLR and CRR. If we hear something from them, then that could materially move the stock.

What is your sense whether HDFC Bank can continue the kind of performance it did because remember the deposit growth was quite stellar this time around, the pace of advances has been pretty strong as well of around 15% to 20%. Do you really think this is going to be sustainable for HDFC Bank?
In the past, we have seen HDFC Bank grow at 20%, 15% to 20% on the loan growth side. We are coming out of a phase where HDFC Bank did not grow its retail book for about one, one-and-a-half years and now they are coming back and growing their retail book properly. So, I feel that 15% to 20% growth as the credit cycle continues over the whole of this year will no longer be a problem.

But the major differentiating factor of HDFC Bank vis-a-vis the other banks is that of the 20% deposit growth, most banks are finding it hard to grow, but HDFC Bank continues to grow very well on the deposit side and as we know bank balance sheets are absolutely clean. NPAs are no longer a problem. So, all in all, no problem as such from the results. Now, we wait for the RBI to tell us how they will treat the HDFC and HDFC Bank merger and will they allow some glide path for the CRR and SLR on HDFC Limited’s book.

How do you see the cost of funds likely to move and how net interest margins are expected to move, though the RBI has hit a bit of a pause button, do you think going forward there will be a bit of contraction of NIMs or do you expect HDFC Bank to continue above the 4% range?
We have seen an erosion in HDFC Bank’s NIMs. The NIMs used to trade at about 4.4-4.5%. It came down to 3.9% because they were not growing their retail book and the wholesale book was growing faster and as we know the wholesale book has a lower yield than the retail book. So, now, I believe from the management as well when I talked to them that 3.9% to 4% is the broad bottom for the NIMs and even though the cost of funds will go up, the loans will be repriced through the MCLR.

So, I think that the NIMs will be sustained at about 4-4.5%, that is the broad level for HDFC Bank. I do not see it shrinking below this level.

How do you see the stock to perform after its Q4 results on Monday?
Yes, absolutely. The commentary from the management on the merger, if there is any commentary, then the stock would react positively.

What is your sense regarding the valuations at what HDFC Bank is trading at and how does it compare with the peers and if you have any pecking order with respect to which banks are you preferring at this point of time?
What has happened is that HDFC Bank is trading at about 2.5 to 3 times price to book, which is at the lower end of its 10-year median valuation. All large private sector banks have seen a derating over the last one year. So, my pecking order would be, number one would be HDFC Bank, contingent on the fact that the merger is near the time horizon and then come ICICI and Kotak and the third one will be Axis Bank which is among the top large private sector banks.



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