HDFC Bank: A long haul to put the merger pain behind?

Despite continuous selling by foreign investors over the last few quarters, HDFC bank's valuation has not been impacted significantly.  (Bloomberg)
Despite continuous selling by foreign investors over the last few quarters, HDFC bank's valuation has not been impacted significantly. (Bloomberg)

Summary

  • Despite HDFC Bank's efforts, the loan-to-deposit ratio is still above 100, and any further deterioration could continue to affect the net interest income growth in the coming months

HDFC Bank Ltd’s performance during the March quarter (Q4FY24) reflects the pain in correcting the elevated loan-to-deposit ratio to 104 from 110 in the previous quarter.

Despite its efforts, the ratio is still above 100, and any further deterioration could continue to hurt net interest income growth in the coming months.

The bank's loans increased by 1.6% sequentially in Q4, against deposit growth of 7.5%. Consequently, net interest income grew by just 2.1% QoQ to 29,077 crore.

Also Read: Indian banks are battling the worst deposit crunch in 20 years

The gap between the yield on assets and cost of funds stood at 3.5%, marginally better sequentially, but still way below 4.1% before the merged bank reporting for the quarterly results began.

Fee and commission income, considered to be the core part of other income, saw a significant increase of 16% QoQ in Q4. As a result, core pre-provisioning operating profit (PPoP) grew 4.6% to 23,174 crore.

However, pre-tax earnings were flat as trading gains, excluding the Credila sale, dropped to about 300 crore.

Notably, the flat profit is after adjusting for non-recurring items, including profit on the sale of stake in education loan company Credila, ex-gratia provision for employees, AIF provision, and floating provision.

Also Read: Mint Explainer: Behind the worst bank deposit crunch in nearly 20 years

There was a big increase in employee costs owing to a one-time ex-gratia provision of 1,500 crore. It could be to retain talent following the exit of senior management, lately.

The bank’s annualized rate of balance sheet expansion stood at 14.4% based on 3.6% growth of Q4FY24. This is well short of the implied 19% compound annual growth rate that the management aspires to achieve to double its balance sheet size every four years. The balance sheet growth may be commonly construed as volume growth.

The other key task for the management is to raise margin—the other lever for profit growth. That is possible by raising the share of CASA deposits from the current level of 38% to the pre-merger level of 42%. As CASA deposits substitute high-cost borrowings that form 18% of total liabilities as against 8% pre-merger, it should help in reducing the overall cost of funds.

The bank has followed the concept of conservatism by making floating provision of 10,900 crore, which is more than the one-time gain made from the sale of stake in Credila worth 7,341 crore.

The conservative accounting helps in absorbing any future shocks in asset quality that might require higher provisioning in the future. Its asset quality has always been one of the best in the industry with gross NPA and net NPA remaining largely steady at 1.24% and 0.33%, respectively.

Normalized credit cost also is less than half percent for Q4FY24. The capital adequacy ratio (CAR) also remains healthy at 18.8% with tier-1 capital at 16.8%, which means there is no risk of equity dilution in the near future.

Meanwhile, foreign holding in HDFC Bank’s shares has declined during the March quarter to nearly 56% from 59% three months ago. Despite continuous selling by foreign investors over the last few quarters, the bank's valuation has not been impacted significantly.

Even if the current share price is reduced for the value of subsidiaries projected at 200- 250 per share by various brokerages, HDFC Bank continues to trade at price to book value of more than 2x based on standalone book value of 590 for FY24.

While there are reports about listing the bank’s NBFC subsidiary HDB Financial, this may not be a big game-changer in terms of valuation.

 

 

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