HDFC Bank, India’s largest private sector lender, currently integrating its merger with its parent last July, anticipates a 4-5 year consolidation period.
Two sources familiar with the matter reveal the bank’s goal of restoring a crucial financial metric to pre-merger levels by the end of this timeframe.
Despite exceeding expectations in its recent quarterly earnings, the bank witnessed a significant 15% decline in its stock, with analysts expressing concerns over lending margins and sluggish deposit growth in the second quarterly report since merging with Housing Development Finance Co.
One of the sources emphasizes, “We will experience a period of consolidation for 4-5 years, during which growth rates and the trajectory of some metrics will differ from what we were accustomed to, but this is a transformed institution post-merger.”
As of December-end, the bank’s return on equity has decreased to 15.8% from exceeding 17% before the merger.
The source states, “We are very focused on profitable growth, and we anticipate the return on equity to revert to pre-merger levels over this 4-5 year period.”
The economic environment and strategic decisions made by the bank will influence other metrics, such as net interest margin, deposit, and loan growth.
Post-earnings, investors and analysts criticized the bank for not meeting certain metrics, particularly margins.
While the bank’s management had previously guided towards margin improvement, this has yet to materialize over the past two quarters.
A fund manager commented, “We believe it will take another couple of quarters before one can see NIM improvement,” according to Macquarie Securities’ analyst Suresh Ganapathy.
Deposit growth is expected to be impacted by the current banking system liquidity deficit, leading to higher rates.
The bank may choose to let go of certain deposits if they do not align with their strategy. The bank aims to maintain a loan-to-deposit ratio of around 80%, reducing the overall LDR ratio.
The liquidity coverage ratio is anticipated to rise to the 115-120% range from the current 110%.
However, net loan growth may slow down as the bank sells off assets, likely from its wholesale loan book, to address high-cost liabilities from HDFC Ltd maturing.
There may be a shift in the loan mix towards retail, aiming for a balanced approach in risk management, growth, and profitability.
Despite these challenges, HDFC Bank remains resilient, with its shares closing 1.4% lower on Thursday, while the broader NSE Nifty was down 0.5%.
