Amidst short-term challenges, HDFC Bank is poised for a significant expansion of its balance sheet over the next 4-5 years, driven by the synergies resulting from its merger, as stated during an investor meeting by the bank’s management.
The management is confident in maintaining a return on assets (RoA) ranging from 1.9 to 2.1 percent immediately after the merger. Moreover, they envision the potential to achieve an RoA exceeding 2 percent in the long term. These insights were shared at an investor gathering organized by Macquarie Capital.
Despite Macquarie’s continued optimism regarding HDFC Bank as the top choice within the sector, the bank may encounter near-term margin pressures. The recent requirement for incremental cash reserve ratio (ICRR), unless accompanied by regulatory exemptions, could exacerbate these pressures. Nevertheless, Macquarie maintains an ‘outperform’ rating on the bank’s stock.
Following the merger, the bank’s net interest margin (NIM) contracted from 4.3 percent to around 3.9 percent, with further reduction to 3.6-3.7 percent anticipated in the near future.
Before the merger, HDFC had built up a substantial excess liquidity buffer of nearly ₹1 lakh crore, resulting in a combined liquidity coverage ratio (LCR) of 125 percent. The bank intends to prudently redeploy this surplus liquidity over the next 2-3 quarters.
Simultaneously, HDFC Bank strategically chose not to accept certain deposits from corporate entities and trusts, adopting specific pricing strategies to moderate deposit growth. While upholding a focus on core retail deposits, the bank is now positioned to leverage HDFC’s expertise to fuel resource mobilization through long-term infrastructure bonds.
The cost-to-income ratio is expected to decrease from 43 percent pre-merger to approximately 40 percent at present. The bank’s aspiration extends to further lowering this ratio to 35 percent over the next 4-5 years.
The bank’s CEO outlined strategic measures such as substituting higher-cost borrowings with more cost-effective alternatives and capitalizing on the advantages of bundling group products. These initiatives are projected to augment the bank’s RoA over the long term.
Anticipating growth, the private lender forecasts a 13-15 percent surge in net advances for FY24, primarily attributed to the reduction of HDFC’s corporate book and interbank participatory certificates (IBPCs). Core net interest margin is expected to be 3.9 percent, accompanied by core loan growth ranging between 18-20 percent.
Recognizing disparities in corporate loans and, to some extent, personal loans, the bank acknowledged an accelerated pace of mortgage disbursements exceeding HDFC’s monthly disbursements.
The management reiterated their commitment to maintaining an open architecture across subsidiaries, fostering healthy competition, and harnessing group synergies to provide premier services and products.
In the realm of bancassurance, the bank intends to identify underperforming branches and gradually elevate HDFC Life’s products to encompass 70 percent of offerings at HDFC Bank’s counters, a notable increase from the current 55 percent.