HDFC Bank’s merger with parent company HDFC Limited has had a significant impact on its performance. The bank’s net interest margin (NIM) contracted 70 basis points to 3.4% in its maiden earnings report post-merger, disappointing investors who were expecting a higher NIM of 3.7-3.8%. This contraction can be attributed to factors such as the Liquidity Coverage Ratio (LCR) and the incremental cash reserve ratio, which affected NIMs 25 basis points.
Additionally, the merged entity’s gross non-performing assets (NPAs) were higher than expected, standing at ₹31,577 crore or 1.34% of gross advances. This increase is partly due to the restructuring of non-retail loans from the erstwhile HDFC book, which had to be reclassified as NPAs.
The cost of funds for the merged entity has also impacted its margins as it is higher than anticipated. However, the bank’s CFO, Srinivasan Vaidyanathan, remains optimistic that the margins will improve over time, especially with a focus on retail loans.
Despite this optimism, analysts have mixed opinions about the bank’s ability to regain its pre-merger margins. The addition of lower-margin home loans from HDFC Ltd. to the loan portfolio may hinder the bank’s efforts to reach its previous levels of profitability.
On a positive note, the merger did bring some advantages, including a lower tax rate of approximately 20% and higher treasury gains. Additionally, the merged entity will need to grow its deposits in order to meet priority sector lending requirements.
However, the current account savings account (CASA) for the merged entity saw a decline of 100 basis points to 38%, primarily due to the inclusion of term deposits from the erstwhile HDFCL.
Despite these challenges, the bank has shown promising growth during the quarter. Deposits for the merged entity reached ₹21 trillion, with a quarter-on-quarter growth of 5.2% and a year-on-year growth of 18.2%. The bank also experienced a significant increase in gross advances, with a growth of ₹1.1 lakh crore.
Looking ahead, HDFC Bank remains focused on growing its retail deposits and meeting its priority sector commitments. Analysts at PhillipCapital maintain a positive long-term perspective on the bank.