Why HDFC Bank shares are rising for three sessions

Shares of HDFC Bank rallied over 3% to hit a fresh 52-week high in early trade on Wednesday amid growing optimism that its weight in the MSCI Global Standard Index could increase. As per the latest BSE data, the foreign institutional investors’ (FIIs) ownership in HDFC Bank, the most weighted stock on Nifty50, dropped below 55% mark in June quarter, which, according to market experts, is likely to boost the banking heavyweight’s weightage in the MSCI index, leading to significant passive inflows. As of June 30, 2024, FII’s shareholding stood at 54.83%, down from 55.54% in the previous quarter, which aligns with the MSCI Index’s requirement to maintain FII stake below 55.5%.

Meanwhile, HDFC Bank shares opened 3.37% higher at ₹1,789 on the BSE, extending gains for the third straight session. Extending opening gains, the stock gained as much as 3.54% to hit a 52-week high of ₹1,791.90, while the market capitalisation rose to ₹13.57 lakh crore.  In three sessions, the banking heavyweight has risen 6.5%, while it has rebounded 31% from its 52-week low of ₹1,363.45 hit on February 14, 2024.

In the overnight trade, HDFC Bank’s depository receipts listed on the U.S. stock exchanges surged 4.5%, snapping its four sessions losing streak, after exchange data showed drop in FIIs holding in June quarter.

Currently, HDFC Bank's weight in the MSCI EM Index is approximately 3.8%. The reduction in FIIs holding to below 55% could be a significant weight change from 3.8% to 7.2% to 7.5%, potentially leading to inflows of $3.2 billion to $4 billion, as per Nuvama Alternative and quantitative research. The foreign holding in HDFCB has favoured the stock (25.9% headroom versus requirement of 25%), leading to a potential weight doubling in the MSCI August 24 review, the research firm says in a note.

“As the FII shareholding moves below 55%, this will necessitate an FII headroom of 25%, causing the half-factor to move to full,” says Abhilash Pagaria, Head, Nuvama Alternative.     

“According to base case calculations, the weight increase should lead to approximately $3.3 billion in inflows. As the impact will be seen within 6 to 8 days and the stock is quite liquid, I don’t believe the weight increase (if it happens) should be staggered; it should occur in one go. If the shareholding favors a weight increase (which has a higher probability), the stock could see a further 10-15% jump until the official announcement in August. In case of an unfavorable outcome, the stock could cool off to around 1,600, at which point we could see good interest from domestic funds,” adds Pagaria.

The forthcoming MSCI EM Index rebalancing will be in August, with the official announcement on August 13. However, price action is likely to occur pre-emptively, as speculation builds ahead of the release of the shareholding data, the research firm says in its note.

In the fourth quarter ended March 31, 2024, HDFC Bank reported decent earnings, with its standalone net profit rising marginally to ₹16,512 crore, compared to ₹16,373 crore in the preceding December quarter. The lender also declared a dividend of ₹19.50 per equity share. The year-on-year figures were not comparable as the lender merged with its parent Housing Development Finance Corporation (HDFC) in July last year.

HDFC Bank's net revenue climbed to ₹47,240 crore, which include transaction gains of ₹7,340 crore from the stake sale in subsidiary HDFC Credila Financial Services during the quarter.  The core net interest income, the difference between interest earned and paid, grew to ₹29,080 crore in Q4 FY24, while the other income increased to ₹18,170 crore. The core net interest margin (NIM) stood at 3.44% on total assets during the quarter under review.

On the asset quality front, the gross non-performing assets (GNPAs) improved to 1.24% from 1.26% in Q3 FY24, while net non-performing assets (NNPAs) rose to 0.33% from 0.31% in the previous quarter.

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