The lender’s quarterly earnings last week prompted a sharp 15% decline in the stock, even as its profit beat expectations, as analysts raised concerns about lending margins and sluggish deposit growth in its second quarterly report since merging with Housing Development Finance Co.
HDFC Bank anticipates a 4-5 year timeline for the complete assimilation of its merger with the parent company last July, as per sources acquainted with the bank’s strategy, as reported by Reuters. The quarterly financial results, released last week, triggered a notable 15% decline in the stock. Despite surpassing profit expectations, concerns raised by analysts centered around lending margins and sluggish deposit growth in the second quarterly report post the Housing Development Finance Co. merger.
“We are entering a phase of consolidation lasting 4-5 years, during which the growth rates and trajectory of certain metrics will deviate from our pre-merger norms. This is a transformed institution now,” stated one of the aforementioned sources.
Preceding the merger, the bank boasted a return on equity exceeding 17%, which has now decreased to 15.8% by December-end.
“We are intensely focused on cultivating profitable growth, and we anticipate the return on equity reverting to pre-merger levels over this 4-5 year span,” emphasized the source.
Various metrics, encompassing net interest margin, deposit and loan growth, will hinge on economic conditions and strategic decisions tailored to the evolving environment, the source added.
Post the earnings release, criticisms emerged from investors and analysts for the bank’s alleged over-promising and under-delivering, particularly regarding margins.
The bank’s management had previously guided towards margin improvement during road shows and investor meetings, but the promised enhancement has yet to materialize, according to an anonymous fund manager invested in the stock.
“We reckon it will require another couple of quarters before observable NIM improvement,” noted Suresh Ganapathy, analyst at Macquarie Securities in a Thursday note.
The bank anticipates deposit growth to be influenced by the prevailing environment, marked by a significant deficit in banking system liquidity, resulting in higher rates.
“In some instances, we have foregone deposits as they do not align with our strategy,” remarked the second source.
Moving forward, the bank aims to sustain a loan-to-deposit ratio of approximately 80%, contributing to an overall reduction in the LDR ratio. The liquidity coverage ratio, or liquidity buffer, is projected to ascend to the 115-120% range, up from the current 110%, according to the same source.
Nevertheless, net loan growth may experience a slowdown as the bank divests assets, likely from its wholesale loan book, due to the maturation of high-cost liabilities from HDFC Ltd.
The composition of loans may shift slightly more towards retail, constituting around 55% of the bank’s portfolio a few years ago compared to the current near 45%.
Navigating this landscape is akin to a tightrope walk, balancing considerations of risk management, growth, and profitability, emphasized the second source.
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