HDFC Bank Plans Accelerated Branch Addition To Focus On Deposits

HDFC Bank Ltd. will quicken branch expansion and focus on garnering low-cost deposits in the next leg of its growth, India's largest private sector lender said at an analysts' meet this week, according to notes by brokerages.

The lender plans to double the balance sheet of the merged HDFC Bank and HDFC Ltd. over a period of five years, it said. The two announced a plan to merge in April. Since then, analysts have raised concerns about the ability of the entities to grow and also whether the merger will remain an overhang on the stock till all regulatory clearances are in place.

The management sought to address some of these concerns at the analyst meet.

Here is what brokerage houses highlighted from the analyst meet:

Macquarie Securities

• The bank highlighted it plans to double the balance sheet of the merged entity over the next five years.

• Management also highlighted its plans to ramp up branch additions significantly to refinance HDFC Ltd.’s borrowings and fund incremental growth.

• HDFC Bank will now be adding 1,500-2,000 branches per year (which will double the current branch count in three-four years), significantly higher than the current run-rate.

• The bank’s CEO also categorically stated the deposit mobilisation strategy will be distribution-driven and not rates (deposit pricing)-led.

• With branch additions expected to ramp significantly over the next five years, HDFC Bank can sustain a 20-25% deposit compounded annual growth. This should enable it to refinance HDFC Ltd.’s borrowings while also achieving its target of doubling the merged entity’s loan book.

• The bank will need to mobilise Rs 1.75 lakh crore of priority sector loans to meet regulatory requirements. It will ramp up its push for affordable housing loans and gold loans significantly. Shortfalls, if any, will be met through priority sector lending certificates.

• The bank will soon be rolling out PayZapp 2.0 (a new payments app) that will also enable online e-commerce purchases (Smartbuy).

Motilal Oswal

• Post merger, the statutory liquidity ratio / cash reserve ratio requirement stands at Rs 85,000 crore. Both HDFC Bank and HDFC have sufficient headroom to meet the same without raising incremental liability.

• The priority sector requirement is likely to be Rs 1.75 lakh crore, of which 50% will be met by priority sector lending certificates and affordable housing loans.

• The total cost of PSLC purchases is likely to be 5-10 basis points. For the balance, the bank has 33 months to be compliant. The management said it can meet the regulatory requirement without any challenges.

• While the bank went slow on the retail segment during the Covid-19 pandemic, corporate asset growth picked up opportunistically. The bank looks at the corporate segment not just from an asset-gathering exercise, but as a segment that helps in increasing liability opportunities and fee income.

• Commercial and rural banking is considered to be the bank’s engine for generating priority sector loans. The management is confident of growing by 25-30% in this segment, with a return on assets of over 3%.

IDBI Capital

• HDFC Bank highlighted that each segment of the bank have performed better with respect to growth, asset quality and return ratios in last three years. Also, these segments have strong growth potential.

• Management highlighted industry dynamics of real estate for next five years should support strong mortgage loan growth which is the key rationale for merger with HDFC.

• The merger will be accretive on a return on assets basis from effective date itself.

• Regulatory requirements can be managed well as compared to earlier in 2014 due to change in norms for NBFCs and higher liquidity on balance sheet for both entities.