HDFC Bank holds 95% in HDB Financial. Not for much longer

“HDB, as per regulations, has a listing requirement in calendar 2025. The bank currently holds HDB as a financial investment and will monetize over a period of time," said the first person. “The bank does not appear to have taken a decision on the glide path towards the same."

With a loan book of ₹84,000 crore, HDB Financial primarily lends to first-time borrowers and underserved segments. HDFC Bank, which holds a 94.7% stake in HDB Financial, will add these categories to its lending basket over time. Currently, the bank provides secured loans to industry and consumers, and also has some priority sector targets.

Analysts tracking the bank say HDB Financial dons the role of a beta-tester as it enters newer market segments before the parent bank gets comfortable in lending to that segment.

Queries sent to HDFC Bank on the matter remained unanswered.

Shares of HDFC Bank crashed after it reported weaker-than-expected December quarter earnings. Growing concerns over slower-than-expected margin recovery amid weak deposit growth caught the bank’s investors off-guard. On Thursday, the Reserve Bank of India allowed Life Insurance Corporation of India to increase its stake to 9.99% from 5.19%, in the bank. This move could stem a further fall in HDFC Bank shares.

Retail deposits during the third quarter grew 2.9%, or ₹53,000 crore, quarter-on-quarter (q-o-q), while total deposits rose just 1.9%, or ₹ ₹41,100 crore, in the same period. This was lower than the ₹1.5 trillion worth of deposits that the bank added in the April-June quarter and ₹1.1 trillion in July-September.

In comparison, the loan-to-deposit ratio increased to 110% in the December quarter versus 107% in the previous quarter. This indicates that the bank’s loan book is growing faster than its deposits, which could make funding future growth a challenge.

The bank funded the incremental credit growth of ₹1.15 trillion through a combination of sequential deposit growth of ₹41,100 crore, borrowings of ₹20,900 crore, a reduction in investment by ₹48,500 crore, and cash and cash equivalents of ₹9,600 crore.

Consequently, the liquidity coverage ratio moderated from 121% in the September quarter to 110% in the December quarter. With liquidity getting tighter both in the banking system and within the bank, it is planning to slow down credit growth and focus on the retail deposit business.

“The bank has always focused on mobilizing granular deposits and will continue to do the same. The quantum of deposits it proposes to raise will be a function of the macro environment, that is, the liquidity in the system," the first person cited earlier said. “It will focus on balancing liquidity coverage ratios and also the credit deposit ratio. Loan growth will be a function of the above," he added.

HDFC Bank could also consider selling some assets on its loan book to release high-cost borrowings. The bank’s low-cost current and savings account stood at 38% at the end of December 2023.

Following the merger of Housing Development Finance Corp. Ltd (HDFC), its erstwhile parent, with HDFC Bank, the bank had guided after its second quarter earnings that margins would get impacted and would be in the range of 3.7-3.8%. This assumption, which was based on the liquidity position of HDFC at the time of the merger, went awry once the merger came into effect as RBI regulations mandate banks to keep high-quality assets.

“The bank is almost a new entity post-merger; hence, starting metrics such as NIM (net interest margin) will be completely different as against the pre-merger indicator," the second person said.

“Margin is a combination of business mix that now includes a substantial portion of mortgages and a proportion of cost of borrowing, which is now 21% of the total funding. The starting point of the margin at 3.4% can be treated as a new beginning to optimize and grow from there on," he explained.

Additionally, banking system liquidity has dropped from a surplus of ₹9 trillion to a deficit of ₹1.4 trillion, adding pressure on HDFC Bank’s liquidity position, he reasoned.

HDFC Bank, by virtue of the merger, also inherited HDFC’s construction finance book, despite its home finance parent monetising and recovering a large portion of the book.

“The watch list accounts in the erstwhile HDFC Ltd’s construction finance book was resolved to a large extent by the erstwhile company. A small residue is still there but will not have a significant impact on gross NPA formation or as a credit cost in the future," the second person confirmed.

HDFC Bank is often seen as a no-surprises bank with its consistent but impressive growth trajectory. However, the December quarter surprised investors, forcing them to re-rate the bank.

“The performance in the last quarter showcases more positives than negatives. However, there were misses on a few aggressive guidance fronts, including NIMs, deposit mobilization and branch expansion. Viewing this from the perspective of whether the miss in guidance is a delay in achieving these goals or if they are unattainable, it seems more like a temporary delay," said Asutosh Mishra, head of institutional equities research, Ashika Stock Broking.

“Significantly, the bank is steadily normalizing its operations post the completion of the merger, and we anticipate the merger’s benefits to become evident from 4QFY24 onwards," he added.

Sources say the reaction at the stock bourses has forced the bank to rethink the guidance front.

The recent turn of events has taught the bank to be more cautious about giving guidance, something that the earlier management used to avoid. Paresh Sukthankar, former deputy managing director, was always careful in giving growth targets. This, perhaps, is the singular learning for the current management as they try to recoup some of the lost lustre in the market.