Street to keep a hawk eye HDFC Bank’s net interest margin and deposit growth trends

• The merged entity’s net interest margins have disappointed the street.
• The growth in NIM will be slow for the bank as well as the sector, say analysts.
• The merged entity’s deposit and loan growth for the quarter has been better than expectations.
  

HDFC Bank’s merger with parent HDFC Limited has expanded its book but affected its profitability. Its maiden earnings report post-merger saw its net interest margin (NIM) contract sequentially by 70 basis points to 3.4%. This disappointed the street as the management guided 3.7-3.8% pro forma NIM for the merged entity.

The Liquidity Coverage Ratio (LCR) of a bank is different than that of an NBFC is one of the reasons for fall in NIMs. “The build up of liquidity to meet the coverage ratio and I-CRR (incremental cash reserve ratio) as luck would have it has affected it by 25 basis points,” said Sashidhar Jagdishan, CEO of HDFC Bank in the earning conference call.

The merged book’s gross non-performing assets were also higher – coming in at ₹31,577 crore or 1.34% of gross advances. Before the merger it was at 1.23%. A 52-basis point impact is related to restructuring of non-retail erstwhile HDFC book. The loans had to be re-classified as an NPA.

“It’s a current and performing loan but had to be reclassified as per guidelines,” said Srinivasan Vaidyanathan, CFO of the bank. He also added that the merged entity’s cost of funds which is higher has also affected the margins.

But he is confident of the margins improving going forward. “The utilization of loan origins focussed on retail should bring this (margins) to a normal level over a period of time,” he said.

The street, however, is mixed on the bank’s ability to go back to its pre-merger margins. “While we expect NIMs to see sequential improvement going ahead as the impact of excess liquidity wane out, it will be difficult to see pre-merger levels as lower margin home loans of HDFC Ltd gets added to the loan portfolio,” said J M Financial.

PhillipCapital too believes that the pressure on margins will continue. “NIM compression due to excess liquidity and accounting adjustment for eHDFC financial is expected to continue for a few quarters. The bank continues to focus on capacity build-up in the near term in a benign credit environment and hence opex to remain elevated,” it said.

Moreover, the sector’s ability to grow NIMs itself will be impacted due to various reasons, opine analysts.

Of taxes and treasury gains

Yet, the merger was not without its advantages. Its tax rate was lower at around 20% and treasury gains were also higher. Moreover, the merged entity would have to grow its deposits in order to meet its priority sector lending requirements.

The current account savings account (CASA) for the merged entity declined by 100 basis points QoQ to 38% on account of addition of erstwhile HDFCL’s term-deposits.

“Growth in deposit and retail loan including SME and agri would take centre stage as the bank will be required to build up retail deposits and meet priority sector commitments. We remain constructive on the bank with a mid-to-long-term perspective,” said PhillipCapital.

And it has shown a good run rate during the quarter. “Merged entity deposits were at ₹21 trillion – a growth of 5.2% QoQ, 18.2% YoY which was almost in-line with the core loan growth. The bank saw deposit accretion of ₹1.1 trillion which was much ahead of the run-rate of quarterly run-rate,” said a report by Systematix Institutional Equities.

Its loan growth has also been healthy – at ₹1.1 lakh crore growth in gross advances post-merger. “We are comfortable with the MSME book and hope to see momentum in home loans. Construction finance will also grow steadily from hereon which will add to the topline and the margin,” said Jagdishan.