HDFC Bank’s merger with parent HDFC Limited has resulted in an expanded book but has also affected its profitability. In its maiden earnings report post-merger, the bank’s net interest margin (NIM) contracted by 70 basis points to 3.4%, disappointing analysts who were expecting a guided NIM of 3.7-3.8% for the merged entity.
One of the reasons for the fall in NIMs is the difference in Liquidity Coverage Ratio (LCR) between banks and non-banking financial companies (NBFCs). HDFC Bank’s CEO, Sashidhar Jagdishan, stated in the earnings conference call that the build-up of liquidity to meet the coverage ratio and incremental cash reserve ratio (I-CRR) has impacted NIMs by 25 basis points.
The merged entity’s gross non-performing assets also increased to ₹31,577 crore or 1.34% of gross advances, compared to 1.23% before the merger. This increase is partly due to the reclassification of non-retail loans from the former HDFC book as non-performing assets.
The CFO of HDFC Bank, Srinivasan Vaidyanathan, attributed the higher cost of funds in the merged entity to the impact on margins. However, he expressed confidence that the margins would improve in the future with the focus on retail loan origins.
Analysts have mixed views on the bank’s ability to return to its pre-merger margins. While some expect sequential improvement in NIMs, they believe it will be challenging to reach pre-merger levels due to the inclusion of lower margin home loans from HDFC Ltd. Additionally, the sector as a whole is expected to face challenges in growing NIMs due to various factors.
Despite the challenges, the merger did bring advantages such as a lower tax rate of around 20% and higher treasury gains for HDFC Bank. The bank will need to focus on growing its deposits to meet its priority sector lending requirements. The current account savings account (CASA) for the merged entity declined by 100 basis points to 38% due to the addition of HDFCL’s term deposits.
PhilipCapital remains constructive on the bank with a mid-to-long-term perspective, highlighting the need for deposit and retail loan growth to meet priority sector commitments. HDFC Bank demonstrated a good run rate during the quarter, with deposits growing by 5.2% quarter-on-quarter and 18.2% year-on-year. The bank also saw a growth of ₹1.1 lakh crore in gross advances post-merger.
Overall, HDFC Bank faces challenges in its net interest margins following the merger, but remains focused on growth in retail loans and meeting priority sector commitments. Analysts have varying opinions on the bank’s ability to return to pre-merger margins, and the sector as a whole is expected to experience difficulties in growing NIMs. However, the bank’s strong deposit and loan growth indicate a positive outlook for its future performance.
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