HDFC Bank shares hit a new 52-week high in intraday trading on Monday following the completion of the merger of parent HDFC Limited. The merger propels the country's largest private sector lender to be among the top four global banks in terms of market cap and analysts feel despite the gains, the stock trades at attractive valuations and should see strong and consistent growth in coming years.
HDFC, the country's largest mortgage lender announced a merger with its subsidiary HDFC Bank back in April 2022 in a $40 billion deal. The merger became effective July 1, 2023.
"This strategic move propels us towards a prominent position among global financial institutions, unifying two influential brands with shared values and a mutual commitment to superior customer service," Sashidhar Jagdishan, the MD and CEO of HDFC Bank wrote in his message to customers.
According to Morgan Stanley analysts Sumeet Kariwala and Bhavik Shah, HDFC Bank trades at 16 times one-year forward earnings per share (EPS) expectations, which is 20 per cent below the 15-year mean.
They feel the merger is synergistic and the bank could be a "compounder at attractive valuations."
"HDFC Bank gets access to secured and long-tenor retail mortgage products as well as a large customer base. Its product suite - plus direct access to insurance and other subs - and geographical reach are superior to those of most private banks," said Kariwala and Shah.
Post the merger of HDFC, the bank will be fully owned by public shareholders and there will be no specific promoter.
HDFC Securities, HDB Financial Services, HDFC Asset Management, HDFC Ergo General Insurance, HDFC Life Insurance and HDFC Capital Advisors will be the key subsidiaries of HDFC Bank post the merger. Up until now, HDFC Bank was only a distributor of their products.
This merger comes at a time the banking sector is seeing strong credit growth. Also, gross non-performing assets of scheduled commercial banks are at a 10-year low of 3.9 per cent as of March 2023, according to the latest Financial Stability Report of the Reserve Bank of India.
The cyclical tailwinds and strong execution will help HDFC Bank navigate merger-related challenges better, said the Morgan Stanley analysts.
"We expect merged loan growth to accelerate from 15-16 per cent currently to 17-18 per cent in four quarters, particularly as mortgage loan growth accelerates," they said.
Manish Shukla and Chirag Gandhi of Axis Capital estimate HDFC Bank's upfront investments in distribution and technology coupled with a strong cross-sell opportunity across HDFC Group's customer base should drive a 17 per cent loan compounded annual growth rate over financial years 2024-2026.
According to Axis Capital analysts, HDFC Bank currently originates home loans from over 2,000 branches and going forward it will start to originate home loans from many more branches. Further, lower penetration of retail products among its customers gives a long runway of growth in retail loans, they said.
"The merger of HDFC Bank and HDFC Ltd will create a behemoth (FY24 loans at Rs 25 trillion, 15.7 per cent market share) that can deliver strong growth (17 per cent loan CAGR) and profitability," said Shukla and Gandhi.
HDFC Bank shares touched a fresh 52-week high of Rs 1,757.80 in morning trading on the BSE. It was trading at Rs 1,730, up 1.7 per cent in the afternoon. The broader BSE Sensex was up 474 points or 0.7 per cent at 65,192.18 level.
