What makes HDFC Bank and HDFC merger a win-win bet? CFO S Vaidyanathan explains

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HDFC Bank announced on April 4 that housing finance major HDFC will be merged with banking major HDFC Bank. Since then, shares of HDFC Bank have gained nearly 3 per cent while the benchmark S&P BSE Sensex has gained 3.7 per cent.

Interestingly, the S&P BSE Bankex, which is the sectoral barometer for the banking sector, is up over 11 per cent in the same period, clearly showing that most banking majors have fared well on the exchanges since April.

Things have been tough for the banking unit that was set up in 1994 – among the first to receive a license from the Reserve Bank of India (RBI) to set up a private sector bank – as shares underperformed the benchmark 30- per cent. Share Sensex in the last two years as well by a huge margin.

To be sure, HDFC Bank shares gained nearly 20 per cent in 2019 when the Sensex declined over 15 per cent. There have been occasions in the past when the private sector lender, which has around 6,500 branches and around 19,000 ATMs spread across 3,226 towns/cities, has outperformed the benchmark in a calendar year.

HDFC Bank is now eyeing a bigger and bigger role in the banking sector and economy with its ongoing merger with its housing finance arm. The bank, on its part, believes that this is a play on the Indian economy, which assumes significance as it is widely believed that India is poised for strong growth in the coming years.

“We are well positioned to capture the increasing credit growth in the banking system with a full suite of products that cater to wholesale, SME as well as retail customers,” says Srinivasan Vaidyanathan, chief financial officer, HDFC Bank.

The CFO further highlights the fact that the liabilities of the housing finance unit will mature over time, which will act as a cushion. The bank has also increased deposit collection and the expanded branch network supported by better sales processes will yield only higher deposits needed to fund the additional liabilities, he added.

edited excerpts

Banking analysts are bullish on HDFC Bank. They cite factors such as strong asset quality, robust loan growth, healthy deposit accumulation, falling slippage ratio and strong ROE. How do you manage these parameters in a large entity like HDFC Bank?

Let me begin by enumerating the overarching philosophy that we have followed over the years. We are a play on the Indian economy, and we believe India is poised for strong growth over the next few years. We are well positioned to capture the increasing credit growth in the banking system with a complete suite of products catering to the needs of wholesale, SME as well as retail customers. Our growing network of over 6,400 branches coupled with digitization has enabled us to deliver our products and services across the country, especially in deep geographies. Another major strength of the bank has been its strong underwriting skills. All these have helped the bank to grow consistently across all business cycles without compromising on asset quality.

Analysts have expressed some concerns regarding the merger of HDFC Limited with HDFC Bank. What are the 3-4 key synergies that you think the merger will bring with it?

Housing is going to be one of the key drivers of the Indian economy in the next decade and home loans are going to be a significant factor in this story. Only 2% of our customers get their home loan through us.

The fact that we have a very wide reach in terms of branches will help us take this trusted product to deeper geographies. Home loan is also an emotional and sticky product which offers huge opportunities throughout the life cycle of the loan. Home loan customers also typically keep deposits 5 to 7 times higher than retail customers and this combined with their longer tenors provide a stronger balance sheet. Since almost 70 per cent of HDFC Ltd customers do not bank with us, the size of the opportunity is huge, and we would not want to miss it at all.

The merged entity (HDFC Bank – HDFC) will be second only to SBI in terms of assets. What are the key challenges and strengths do you envisage after the merger?

As stated earlier, we will have a trusted housing finance brand, and the two merged entities (subject to necessary approvals) will result in a larger and stronger bank. Today, we are primarily a seller of home loans and a small portion of these are on our account. The asset will now be much larger and will take advantage of the low cost of funds raised by the bank. We will add approximately 3500 people who will bring their expertise to a unique product and deep customer relationships. These are all major forces. Yes, there will be some challenges in terms of integration, but these will be purely temporary in nature. We view this as a win-win for both entities and would like to believe that the potential merger will present far more opportunities than challenges. The culture and value system of both the companies are similar.

What challenges do you see on the deposit side as a large portfolio of assets of an NBFC is shifted to the banking arm? What would be the additional regulatory requirements with respect to CRR and SLR? Any plans to raise capital in the near future?

HDFC Ltd’s liabilities will mature over time. It acts as a cushion in itself. In addition, we have increased deposit collection and with an expanded branch network supported by improved sales processes, we should be able to generate the necessary deposits to fund the additional liabilities that may be required.

Furthermore, both entities are very well capitalized. Post-merger, we will have one of the highest capital adequacy ratios in the industry and will not need to raise funds immediately. Of course, the bank will continue to raise loans in the course of its regular business.

What will be the business mix of retail and wholesale and within retail, how will the mix change with HDFC’s mortgage portfolio?

We cannot comment on future basis. But a pro forma balance sheet of the merged entity as on December 31, 2021, will see that mortgages comprise 33 per cent of the loans; commercial and rural banking comprises 24 percent; retail banking 21 per cent corporate banking 19 per cent and construction finance 3 per cent. A larger share of secured lending results in a stronger balance sheet.

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