HDFC Bank, HDFC share prices slip: Behemoth in the making but near term challenges remain; check target prices

HDFC Ltd and HDFC Bank shares fell in red on Tuesday morning, after having soared nearly 9% each earlier on Monday. While the merger between the HDFC twins has been much talked about and praised, some investors do see challenges in the near term, even as the future potential is still not ruled out. On Tuesday morning, HDFC Bank was the top laggard on Sensex, down 2.68% at Rs 1,612 per share; while HDFC was down 1.6% at Rs 2,636 per share.

Behemoth in the making

The merger of HDFC and HDFC Bank is likely to result in a formidable entity. “After the merger, HDFC Bank’s loan book will cross Rs 18 trillion and it will become the 8th largest bank globally by market cap,” said analysts at Emkay Global. Earlier yesterday, global rating agency S&P Global said that the proposed merger of HDFC with HDFC Bank will substantially increase the private lender’s market share, making it twice as big as rival ICICI Bank. In the third quarter of the previous fiscal year, HDFC Bank had a total loan book of Rs 12.69 trillion, and HDFC had Rs 5.26 trillion. The merged entity would have a loan book of Rs 17.95 trillion.

Huge cross-selling opportunities would also arise for HDFC Bank as it takes over HDFC’s mortgage book. Currently, around 68 million HDFC Bank customers do not have a mortgage. “This represents a huge growth runway for HDFCB once the merger transaction is complete. Further, a substantial share of business coming from a long-tenor product such as mortgage will help diversify HDFCB and enable it to increase asset duration,” analysts at Nirmal Bang said in a report.

Challenges galore

Kotak Securities has a positive long-term outlook on HDFC and HDFC Bank but anticipates a few challenges in the near term. “The short-duration book brings its own challenges, especially during periods of economic slowdown (ability to replenish and grow is not easy), particularly at the size it is operating,” Kotak said. Among the challenges seen by the brokerage firm is managing liability post-merger. HDFC Bank would need to replace the bonds and debentures that it would have at the time of the merger. Additionally, there are also regulatory challenges given that HDFC bank will now own a number of non-lending businesses through the transfer of HDFC Ltd ownership to the bank, something that the RBI may not be comfortable with.

“The mortgage business is quite challenging to generate a higher RoE as compared to the current mix of the loan portfolio for the bank. A higher share of housing loans would moderate the return ratios,” the brokerage firm said. “Synergies do not seem to be high given the limited overlap in businesses,” Kotak Securities added. 

Target prices maintained

• Emkay Global has a Buy rating on HDFC Bank with a target price of Rs 2,050 apiece. The brokerage firm has kept the target price and rating unchanged. 
• Nirmal Bang has also maintained its Buy rating with a target price of Rs 2,151 per share. 
• Anand Rathi has a Buy rating on HDFC Bank with a target price of Rs 1,923 per share.
• Kotak Securities has a Buy rating on both HDFC and HDFC Bank. The fair value for HDFC Bank has been increased to Rs 1,780 per share and that of HDFC has been trimmed to Rs 2,990 apiece, reflecting its share swap ratio with HDFC Bank.