HDFC Bank is looking to double its balance sheet over the next 4-5 years on the back of its recent merger, according to the bank’s management during an investor conference. Despite impending short-term challenges, the management expressed confidence in maintaining Return on Assets (RoA) ranging from 1.9% to 2.1% immediately following the merger of HDFC, with the potential for long-term RoA exceeding 2%.
Following the merger, the bank’s Net Interest Margin (NIM) contracted from 4.3% to approximately 3.9%. A further reduction to 3.6-3.7% in the near term is likely. Preceding the merger, HDFC had built a substantial liquidity buffer of nearly Rs 1 lakh crore, resulting in a combined Liquidity Coverage Ratio (LCR) of 125%. The bank now intends to redeploy this excess liquidity over the next 2-3 quarters, according to analyst reports.
Deposit growth
Concurrently, HDFC Bank adopted a deliberate strategy of reducing certain deposits from corporate entities and trusts at differentiated pricing, aimed at moderating deposit growth. While core retail deposits remain a focal point, the bank seeks to harness HDFC’s expertise to stimulate resource mobilisation through long-term infrastructure bonds.
Emphasising an open architecture approach across its subsidiaries to promote robust competition and excellence in products and services, HDFC Bank will proactively identify underperforming branches for expansion within its bancassurance offerings. The long-term goal is to elevate HDFC Life’s products to account for 70% of HDFC Bank’s offerings, an increase from the current 55%.
Cost-to-income ratio
The bank’s Cost-to-Income ratio is projected to decline from 43% before the merger to around 40% at present, with aim to further reduce it to 35% over the coming 4-5 years. The replacement of HDFC’s borrowings with more cost-effective borrowings, coupled with the bundling of group products, could augment RoA in the long term, according to the bank.
HDFC Bank forecasts a growth in net advances at 13-15% for the fiscal year FY24, primarily due to the winding down of HDFC’s corporate book and Interbank Participatory Certificates (IBPCs). The bank anticipates core Net Interest Margin to be 3.9%, while core loan growth is expected to range between 18% and 20%, according to a released note.
Amid the evolving corporate lending landscape, HDFC Bank recognizes disparities in corporate loan segments and, to a lesser extent, personal loans. Conversely, mortgage disbursements are already surpassing HDFC’s monthly figures.
