Battling Merger Blues At HDFC Bank

EVERY 14TH INDIAN banks with HDFC Bank. India’s largest private bank is up against some serious headwinds as MD & CEO Sashidhar Jagdishan battles the fallout of the merger with parent HDFC — both internally and externally. Internally, on its books, its industry-leading liability and return statistics have taken a hit ever since the merger took place in July 2023.

Having incorporated the low-yield home loan products from parent HDFC into its balance sheet, HDFC Bank shocked the Street with its net interest margin (NIM) declining from a peak of 4.6% to just 3.4%. The management, however, believes the NIM will slowly inch up to 4% in about four years.

Historically, the bank never had to borrow excessively to lend. Now it does. Its loan-to-deposit ratio has jumped from 85% pre-merger to 110% now. The fund mix has also been impacted due to nearly ₹5 lakh crore of long term, non-redeemable bonds from the parent, which have ballooned the percentage of high-cost bonds in its liability mix from 7% to 21%. Besides, against a planned addition of 1,500 new branches in FY24, just 264 new branches have been opened in the past nine months.

Externally, the stock market isn’t enthused about the dent on its financials. From its peak closing price of ₹1,728 (July 4, 2023), the stock fell 20% to its closing low of ₹1,384 (February 14, 2024) before recovering to ₹1,421 on (February 23, 2024), trading close to its 20-year low price-to-book ratio. In fact, since the year began, the market cap of the index heavyweight has come off 16% (February 23, 2024). You can’t fault the market, after all, HDFC Bank had set some very high standards. Its net NPA — just 0.30% on gross advances of nearly ₹25.21 lakh crore — is among the lowest in the industry.

Even so, Jagdishan’s three years as CEO have been quite eventful. Not only did he assume charge in the middle of a raging Covid, but the bank, too, got rapped by the regulator for its digital missteps which have been rectified since then.

With 93 million customers, it is one of the most systemically important banks in India’s financial system. Further, at ₹25.21 lakh crore in advances, it is double that of nearest private sector rival, ICICI Bank. HDFC Bank accounts for 10.78% of overall deposits and 15.80% of outstanding credit of the banking system.

Is this really the pause before the storm? Read V. Keshavdev’s engrossing cover story on how Jagdishan — a 28-year HDFC veteran — is tackling the enormous challenge.

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