We live in a new normal — an era marked by increased retail participation in capital markets. Though bank deposits still reign supreme with the highest share of household savings in financial assets, banks been having a hard time, with retail investors increasingly turning to capital markets. It is in this backdrop that HDFC Bank has merged with HDFC Ltd and marked the first anniversary of the union on June 30, 2024, the recently concluded quarter.
While the bank has inherited the loan book of the housing finance NBFC, it has also inherited an unfavourable credit-deposit ratio (CD ratio) along with it — something as high as 109 per cent. Bringing this ratio to safer levels is going to be a Herculean task for the management, given the waning patronage for bank deposits. Post the merger, the bank has indeed slowed the pace of loan growth and focussed on deposit growth. CD ratio, too, has declined to 104.5 per cent as of June 2024. As the other aspects of the bank’s fundamentals are largely all right, we recommend that investors accumulate the bank’s shares, while keeping a watch on the deposit growth, going forward. Read on as we take a closer look at how the bank has fared in the 12-month period post-merger.
The credit-deposit conundrum
The merger fetched a cool loan book of about ₹6.25 lakh crore to HDFC Bank’s books. But along came a staggering CD ratio of 109 per cent. This is because, deposits made up only 26 per cent of HDFC Limited’s financial liabilities (FY23), while loans and debt securities made up for the rest. This is way lower when compared to HDFC Bank pre-merger, where deposits made up 87 per cent of the bank’s liabilities. And deposits, especially the current accounts and savings accounts (CASA), are low-cost in general, versus the loans and debt securities. The Net Interest Margin (NIM) also took a hit as a result and dropped from 4.1 per cent pre-merger to 3.4 per cent, a quarter past the merger.
The management recognises this and has since gone slower on the advances highway. While gross advances have grown 5.6 per cent between Q2 of FY24 and Q1 of FY25, deposits have grown 9.5 per cent in the same period. Gross advances came in at ₹24,869 billion as of Q1 FY25, having declined 0.83 per cent on a sequential basis.
On the deposits front, the bank registered a minor de-growth of 0.03 per cent on a sequential basis in Q1 FY25. The management attributes this to the seasonal nature of the quarter, aggravated by unanticipated run-offs in the current account balances. On a QoQ basis, time deposits grew 3 per cent and savings accounts saw a mild de-growth of 0.38 per cent. The QoQ de-growth in current accounts was substantial though, at 13.8 per cent. This even led to a fall in the CASA ratio, from 38 per cent in Q4 FY24 to 36 per cent now.
Nevertheless, an analysis of the information on quarterly average deposits included by the bank in its analyst deck paints a different picture. Since FY22, the bank has recorded a mean sequential growth in average deposits of 4.98 per cent for the first quarter of a financial year. For FY25 Q1, the QoQ growth in average deposits has come in at 4.59 per cent, which seems largely fine. The management is hopeful of growing deposits, leveraging the bank’s mammoth network and service quality, without going aggressive on the deposit rates. The bank has added around 2 million customers during the quarter.
As far as borrowings are concerned, the bank has reduced ₹629 billion during the quarter. As a result, borrowings as a percentage of total capital and liabilities have declined from 21 per cent as of the first quarter after the merger (September 2023), to 17 per cent now. The management expects to settle another ₹350 billion at maturity and some more before maturity, during the upcoming quarters of FY25.
Income, costs and asset quality – a closer look
Net Interest Income (NII) has grown 26 per cent for the 12 months post-merger, compared to the NII for the 12 months preceding the merger. For Q1 FY25, despite the slow deposits, especially the low-cost CASA deposits, the bank managed a marginal increase in NIM of 3 basis points (QoQ) to 3.47 per cent, owing to spreads remaining intact.
Net profit has grown 39 per cent for the 12 months post-merger, compared to the 12 months preceding the merger. For Q1 FY25, net profit declined 2 per cent sequentially. This is due to two reasons. First, Q4 FY24 saw certain one-off items such as transaction gains and tax credits, giving a high base. Second, fee income during the bygone quarter declined by ₹10 billion, spearheaded by the fall in fee income from third-party products. Operating expenses were down 7.5 per cent, leading to a cost-to-income ratio at 41 per cent, having shed 30 bps on a QoQ basis. The management is sanguine about taking this further down to around 30 per cent levels as the bank settles high-cost borrowings and replaces them with deposits in the transition period.
Asset quality has largely remained steady post-merger. Q1 FY25 GNPA ratio rose marginally from 1.24 per cent to 1.33 per cent sequentially owing to a 20 bps and a 10 bps rise in the GNPA ratio of CRB (Commercial and Rural Banking) and corporate segments, respectively. Asset quality deterioration in the CRB segment is largely due to seasonality. Credit costs have declined and are flat at 42 bps.
Bottom line
The shares of the bank are down close to 10 per cent from the recent highs of ₹1,794. The bank is trading at a trailing price-to-book value of 2.59 times on a consolidated basis. The FY25 and FY26 forward price-to-book value stands at 2.49 and 2.2 times. Hence, accumulating the bank’s shares would be appropriate for those who wish to stand with a resilient bank as it finds its seemingly lost glory through a tough transition period. Given its pristine track record, underperformance in the shares during the transition phase offers a good opportunity for long-term investors.