InvestorQ : My broker is telling me that I should sell my HDFC Bank shares and invest in ICICI Bank? Do you thing it is a good idea, since HDFC Bank has given be good returns over 15 years.
sarah Leo made post

My broker is telling me that I should sell my HDFC Bank shares and invest in ICICI Bank? Do you thing it is a good idea, since HDFC Bank has given be good returns over 15 years.

Answer
image
Rashi Mehra answered.
9 months ago
Follow

That is a tough call and would depend on your specific risk appetite. However, I think your broker decision is perhaps driven by the fact that the stock of HDFC Bank recently touched a 52-week low plus the negative cues around the stock. I remember, there was a time not too long ago when the only smart thing to do in the stock markets was to buy HDFC Bank. As you said, the bank never disappointed the analysts or the investors.

The story of HDFC Bank was built on consistent performance quarter after quarter combined with robust Net Interest Margins (NIM). The asset quality of HDFC Bank was impeccable and interestingly, both these are true even today. What has changed is that ICICI Bank appears to have put its house in order and picked up steam in the last 18 months. Today, in terms of ROE and NIMs, ICICI Bank is at par with HDFC Bank, from a huge gap.

Ironically, even the recent merger announcement of HDFC Bank and HDFC Ltd has not gone down too well with the investors. After scaling close to its 52-week high of Rs1,724 post-merger, the stock has fallen sharply in 45 days to a 52-week low of Rs1,282. There were several concerns that came up along with way in the HDFC Bank / HDFC Ltd merger.

1. The first concern was the swap ratio. Shareholders of HDFC will get 42 shares of HDFC Bank for every 25 shareholders held by them. This is seen as unfair to HDFC Bank shareholders despite its richer valuations.

2. The second concern is over integration of two huge organizations. There is a feeling that HDFC will add to the size of HDFC Bank without adding to its value. Also, markets are worried that RBI may have a problem with the insurance franchise of HDFC Ltd.

3. Finally, there is concern over the timing of the merger deal. The idea was opposed by Aditya Puri and hence was never taken up when he was not there. The action will now shift to how the institutional investors react and vote on the merger.

You are right on the quick growth shown by ICICI Bank. For example, HDFC Bank had a NIM advantage of around 125-130 bps over ICICI Bank, but now NIMs are on par. That has narrowed the valuation gap between ICICI Bank and HDFC Bank and the merger has dampened sentiments. However, HDFC Bank is now cheaper than ICICI Bank on valuation metrics. I would think you should use this dip to add more of HDFC Bank stock.

19 Views