HDFC Bank prepares for consolidation period following mega-merger

In light of the current banking system liquidity deficit, HDFC Bank expects deposit growth to be influenced by higher rates. The bank is selective in retaining deposits that align with its profitability objectives.

India’s largest private sector lender, HDFC Bank, anticipates a period of consolidation lasting 4-5 years as it absorbs its mega-merger with its parent company last July, according to sources familiar with the bank’s strategy.

Despite a recent decline in its stock value prompted by concerns over lending margins and sluggish deposit growth in its second quarterly report post-merger, HDFC Bank remains optimistic about restoring key financial metrics to pre-merger levels within the specified timeframe.

The merger has significantly impacted HDFC Bank’s performance metrics, including its return on equity, which has declined from above 17% to 15.8% as of December-end. However, the bank is determined to focus on profitable growth and aims to restore its return on equity to pre-merger levels over the consolidation period. Other performance indicators such as net interest margin, deposit and loan growth will depend on the economic environment and strategic decisions made by the bank.

Investors and analysts have criticized HDFC Bank for over-promising and under-delivering on certain metrics, particularly margins, following its recent earnings report. Despite previous guidance from the bank’s management regarding margin improvement, the expected progress has yet to materialize. Analysts suggest it may take another couple of quarters before noticeable improvement is observed in net interest margins.

In light of the current banking system liquidity deficit, HDFC Bank expects deposit growth to be influenced by higher rates. The bank is selective in retaining deposits that align with its profitability objectives. Additionally, HDFC Bank aims to maintain a loan-to-deposit ratio of around 80% to reduce its overall loan-to-deposit ratio.

Furthermore, the bank anticipates some slowdown in net loan growth as it plans to sell off assets, particularly from its wholesale loan book, to manage high-cost liabilities from HDFC Ltd as they mature. As a result, the composition of HDFC Bank’s loan portfolio may shift slightly more towards retail loans, which constituted 55% of the bank’s book previously compared to approximately 45% currently.

Navigating through these transitions, HDFC Bank acknowledges the need for a balanced approach, considering risk management, growth, and profitability. The bank views the consolidation period as a strategic opportunity to realign its operations and strengthen its position in the market. Despite short-term challenges, HDFC Bank remains committed to delivering sustainable growth and value to its stakeholders.

Thus, HDFC Bank’s outlook reflects a cautious yet optimistic approach as it embarks on a journey of consolidation following its landmark merger. With a clear focus on restoring key performance metrics and adapting to evolving market dynamics, HDFC Bank aims to emerge stronger and more resilient in the long term.