HDFC Bank - Bullish On Balance Sheet Expansion, Sustaining RoA: Nirmal Bang

Nirmal Bang Report

We recently hosted the management of HDFC Bank Ltd., as part of the two-day Nirmal Bang investor conference. The bank’s management provided updates about the merger with Housing Development Finance Corporation Ltd. and clarifications on priority sector lending requirements thereof.

It highlighted the renewed focus on revamping their technological capabilities and furthermore emphasised on scaling up the unsecured retail book.

The management indicated that the bank’s margin may be impacted by the merger transition, but it is confident of sustaining return on asset ~1.9-2%. We continue to remain positive about HDFC Bank.

Merger update and PSL requirement post merger:

The merger is on schedule and is expected to be completed by July 2023. HDFC Bank is likely to get Rs 1.25 trillion in deposits and Rs 1.5 billion in bonds from HDFC. The management indicated that with the Reserve Bank of India’s dispensation received, only one third of ~Rs 6 trillion would be included in the first year post merger for PSL requirement, which would be ~Rs 800 billion.

Moreover, PSL requirements are looked at on a quarterly basis and thus September 2023 will be the first reckoning date post merger. However, on that date, the ANBC being looked at would be of one year prior i.e. of Sep-22. Thus, HDFC's assets will not be included for PSL requirements on Sep-23 and would come for recognition.

The management also highlighted that HDFC’s loan book consists of Rs 400 billion of PSL compliant credit. Further, the bank has shortfall on the small and marginal farmers’ bucket of PSL requirements and is likely to put a cost of ~1.5% at the profit before tax level.

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