HDFC Bank's shares have seen a turbulent period in the aftermath of its merger with parent company Housing Development Finance Corp. (HDFC). The shares of the merged entity, which now trade under HDFC Bank, have dropped nearly 9% since it began trading as a combined entity on July 1, 2023. On Wednesday, the shares closed almost 4% down after the bank shared an update on the merged entity's financials and related matters during an analysts' meeting.
The bank has identified potential short-term issues following the merger, including a decline in net interest margin (NIM), net worth, and asset quality. These anticipated challenges are primarily due to accounting adjustments that resulted in a lower book value for the combined entity than HDFC Bank's standalone book value. This revelation has led several brokerages to cut their targets on the stock and downgrade their ratings.
Global brokerage firm Nomura downgraded HDFC Bank stock to a 'neutral' rating and lowered its target price. Nomura cited several negative surprises from the meeting, including adjustments to net worth and NIM cuts. Meanwhile, Kotak Institutional Equities also reduced its fair value target for the bank.
Despite these short-term challenges, Goldman Sachs maintained a bullish outlook on HDFC Bank, reiterating its buy rating and setting a target price that implies a 26% upside potential. The bank's ability to manage its loan book, increase return ratios, and avoid raising capital in the foreseeable future are seen as positive factors contributing to its long-term prospects.
In other news, despite lagging behind the benchmark Sensex over the past year with only a 4% increase compared to the Sensex’s 13% gain, the Reserve Bank of India (RBI) has approved the reappointment of Sashidhar Jagdishan as the bank’s managing director and chief executive officer for three more years. This move provides continuity and stability in leadership, which is seen as crucial during this period of transition and adjustment.
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