JPMorgan 'overweight' on HDFC Bank after HDFC twins merger; here's why

livemint.com:

JPMorgan is positive about HDFC Bank stock after the merger of HDFC twins as the global financial firm recently assigned an 'overweight' rating on the stock, pegging the target price at ₹2,000, citing the merger of HDFC with HDFC Bank is positive from a medium-term perspective. "Following a period of restriction, we are moving to an 'overweight' rating and a March 2024 target price of ₹2,000 from a 'not rated' designation.

We believe the merger with parent HDFC is positive from a medium-term perspective, given the opportunity for liability refinancing, cross-sell, addition of book duration and lower share of unsecured loans," said JPMorgan in a report on July 11. "We estimate the merged entity to deliver a nearly 17 per cent EPS CAGR over FY23-25E, driven primarily by a 16 per cent loan CAGR estimate.

We estimate ROA for the bank to be maintained at 2 per cent. Our target price implies 2.6 times FY25 PB/17 times FY25 PE for the parent bank and equates to 2.7 times FY25/18 times FY25 consolidated PB/PE," said JPMorgan.

(PB refers to the price-to-book ratio while PE refers to the price-to-earnings ratio.) The financial firm said the HDFC-HDFC Bank merger is EPS (earnings per share) neutral, BPS (book value per share) accretive by 7 per cent and over time offers a potential nearly 24 bps accretion to ROA (return on assets). However, JPMorgan highlighted that in the near term (next two years), the merger also risks slowing growth given elevated LDR (loan-to-deposit ratio) and ask on liability refinancing and lower ROE (return on equities), given excess capital.

"Incremental LDR and retail deposit growth key to monitoring given the elevated LDR at 109 per cent at the point of merger. Given the constraint is around funding