Of the Rs 24,000 crore approved by the board, Rs 8,500 crore would be coming from the parent, HDFC Ltd. The rest will be raised through QIP, ADR, and GDR (global depositary receipt).
The equity-raising will result in a dilution of five per cent, say analysts. The capital infusion by HDFC Ltd will maintain or exceed its current shareholding of 21.7 per cent in the bank, they add.
According to analysts, it makes sense for the bank to raise funds now when the markets are good and the bank is enjoying a healthy valuation. The stock has increased 58.16 per cent in the past one year. It closed at Rs 1,868.05 on the BSE, 0.91 per cent lower than the previous close. A year ago, the stock was at Rs 1,180 apiece.
The bank’s capital adequacy ratio was healthy enough, but private sector banks
always want to maintain a high capital.
However, the impending International Financial Reporting Standards (IFRS) means banks
would require higher capital to set aside more provisions for their bad debts.
The norms require banks
to recognise bad debt sooner and estimate lifetime expected losses against a wider spectrum of assets. That means higher provisions. Unlike government banks, private sector banks don’t have a sure backer and therefore, are usually more proactive than the rest.
“The fundraising is a function of both - expectation of higher growth and good valuation now,” said Udit Kariwala, senior analyst, financial institutions, India Ratings and Research.
“We expect capex recovery to take place around FY20. Private banks like to upfront equity requirement, but the infusion comes with a return expectation. Refinancing and stressed assets could be envisaged as some of the opportunities,” Kariwala said, adding some private banks could also hit the market now, partly because of valuation and also because of IFRS requirements.
The fundraising will further enhance the premium valuation of HDFC Bank, wrote IDFC Securities in a research report. HDFC Bank has a price-to-book value multiple of 4.7, which is one of the highest in the banking sector already.
“The new issue will help fund growth and strengthen the capital adequacy. This will help HDFC Bank strengthen its market share and its premium valuation. As the issue will likely be book value accretive, we expect multiples to remain intact even post-dilution,” said Mahrukh Adajania and Sanket Chheda, analysts with IDFC Securities, in their report.
Preferential issuance to the promoter HDFC Ltd will happen at the face value of Rs 2 per share. The bank has also set up a special committee to decide the terms and conditions of the issue; it has not specified a date for the issue.
HDFC Bank’s net profit for the quarter ended September 2017 saw a rise of 20.1 per cent year-on-year, whereas total advances and deposits grew by 22.3 per cent and 16.5 per cent, respectively.