Why is HDFC Bank trading at a 52 week low

There was a time when the only smart thing to do in the stock markets was to buy HDFC Bank. For a long time, the bank never disappointed the analysts or the investors. Most of us would believe that all banking stocks could correct, except for HDFC Bank.

That was backed by consistent quarter after quarter of growth and healthy Net Interest Margins. In addition, the asset quality of HDFC Bank was impeccable. What has changed so suddenly?

Actually, there is some pressure on the number as you would see other banks like ICICI Bank streaking ahead in NIM and ROE performance. HDFC Bank is still a formidable name, but now it has competition. As they would say, somewhere the magic or the mojo appears to be missing.

One thing we all learnt in the markets is that there is never smoke without fire and if HDFC Bank is under pressure, there must be a reason for it.

The fall has been stark. Just a few days after the merger between HDFC Bank and HDFC was announced, the stock scaled very close to its 52-week high of Rs.1,724. In a span of less than 45 days, the stock of HDFC Bank has oscillated from a 52-week high of Rs1,724 to a 52-week low of Rs1,282.

Unlike the popular perception, the HDFC Bank merger with HDFC was not going to be roses all the way. There were just too many red flags along the way.

As the reality of the merger announcement on 04th April began to sink in, there were 3 major concerns that appeared to be coming to light. The first was the swap ratio. As per the terms of the agreement, the shareholders of HDFC were to get 42 shares of HDFC Bank for every 25 shareholders held by them.

HDFC Bank analysts felt it was a case of giving away the massive franchise of HDFC Bank too cheap. More so, considering that it is HDFC Bank that is more valuable and is also the one to bear the cross of the merged entity.
 

The second concern is with respect to the integration of two massive organizations. The worry is that the commitment to retain the full staff of HDFC would be too much of a burden and would literally stymie rationalization.

The other worry is on the regulatory front. HDFC group is a leader in life and non-life insurance among private players. It is not clear if the RBI and IRDA would be happy with an insurer integrating with a large bank.

There are other concerns that have arise in the markets. One question is why was the merger deal not pushed through when Aditya Puri was in charge of HDFC Bank. It is no secret that Puri had opposed the merger tooth and nail.

Now the markets are concerned that the merger was being pushed through in a hurry with a new CEO in place. A lot will depend on how the large army of institutional investors react and vote on the merger.

Analysts are of the view that the timing of the merger may have been bad. Amidst the Russia Ukraine conflict, softening margins and weak retail credit growth, markets were hardly interested in mega mergers. Investors would have been happier with the bank staying its course and returning to what it is best at.

Not to forget, there is an overhang of higher CRR and SLR requirements that HDFC Bank will have to meet on a larger base.

But the one thing that is concerning the investors is the rapid strides made  by ICICI Bank. Just about few years back, HDFC Bank had a NIM advantage of around 125-130 bps over ICICI Bank. Today, their NIMs are on par.

That has already resulted in a narrowing of the valuation gap between ICICI Bank and HDFC Bank. The merger could further dampen sentiments due to the uncertainties. The price is just reflecting that.