HDFC Bank sees return on equity rebounding to pre-merger level in 4-5 years: Report

HDFC Bank will take 4-5 years to fully digest its merger with its parent but expects to restore a key financial metric to pre-merger levels at the end of that period, two sources told Reuters.

HDFC Bank’s return on equity was above 17% before the merger with Housing Development Finance Corporation Ltd (HDFC), but it has since declined to 15.8% as of December-end.

“We will see a period of consolidation for 4-5 years during which growth rates and trajectory of some of the metrics will differ from what we were used to in the bank but this a different institution now after the merger,” one of the sources told Reuters.

“We are very focused on profitable growth and we will see the return on equity move back to the levels we saw before the merger over this 4-5 year period,” the source added.

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Other metrics, including the net interest margin, deposit and loan growth will be contingent on the economic environment and the strategic decisions the bank makes to adapt to the environment, the person said.

HDFC Bank share price has crashed more than 15% since the lender reported its financial results for the third quarter of FY24 on January 16.

The bank reported net profit growth of 33% year-on-year (YoY) to ₹16,372 crore, while its net interest income (NII) rose 24% YoY to ₹28,470 crore.

Analysts have raised concerns over the bank’s margins and sluggish deposit growth. The bank has grown its deposit base by 1.9% QoQ but retail deposits have grown by 2.9% QoQ. Management has cautiously reduced the wholesale deposit base from ~17% of total deposits in March 2023 to 16% in December 2023. 

Read here: HDFC Bank Q3 Results Highlights: Net profit rises 33% to ₹16,372 crore, NII up 24% YoY

Kotak Institutional Equities' analysts believes HDFC Bank needs more time to deliver best-in-class return ratios. 

“The underlying deposit growth environment has deteriorated with deposit growth slower and the quality of deposits has shifted to term over CASA deposits, making it harder to forecast the cost of funds. Management has guided for an improvement in CD ratios but it appears to be a gradual improvement. As we move into FY2025, the key risk is forecasting the impact of PSL-related charges, if any,” said the brokerage.

At 1:50 pm, HDFC Bank shares were trading 1.92% lower at ₹1,427.85 apiece on the BSE.

(With inputs from Reuters)