• Thu. Dec 7th, 2023

Housing Finance Bank

Housing Finance Bank, The Real Thing

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

HDFC Bank on April 4 announced that the housing finance major HDFC will be merged with the banking major. Since then, shares of HDFC Bank have risen 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 of the banking majors had a good run on the bourses since April.

The going has been rough for the banking entity that was set up in 1994 – among the first ones to get a license from the Reserve Bank of India (RBI) to set up a private sector bank – as the shares have underperformed the benchmark 30-share Sensex in the previous two years and by a wide margin as well.

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

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

“We are well positioned to capture the expanding loan growth in the banking system with a complete suite of products that cater to the 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 entity will mature over a period of time, which will act as a cushion. The bank has also enhanced deposit mobilisation and the expanded branch network backed by improved sales processes will only lead to higher deposits needed to fund the additional liabilities, he adds. 

Edited excerpts

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

Let me start by enunciating the broad philosophy that we have followed over the years. We are a play on the Indian economy, and we believe India is poised for robust growth over the next few years. We are well-positioned to capture the expanding loan growth in the banking system with a complete suite of products that cater to wholesale, SME as well as retail customers. Our growing network of over 6,400 branches allied to digitalisation has enabled us to deliver our products and services across the country, especially in the deeper geographies. Another key strength of the bank has been its strong underwriting skills. All this has helped the bank grow consistently across business cycles without compromising on asset quality.

Analysts have voiced a few concerns related to the merger of HDFC Ltd 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 over the next decade and home loans are going to be a key factor in this story. About only 2 per cent of our customers source their home loans through us. 

The fact that we have a much wider reach in terms of branches will help us take this trusted product further into deeper geographies. A home loan is also an emotional and sticky product offering huge opportunities across the life cycle of the loan. Home loan customers also normally keep deposits that are 5 to 7 times more that of retail customers and that coupled with their longer tenure lends strength to the balance sheet. Since about 70 per cent of HDFC Ltd’s customers do not bank with us, the size of the opportunity is huge, and we would not like to miss this 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 you envisage post a merger?

As stated before we will have a trusted housing finance brand with us, and the two merged entities (subject to necessary approvals) will result in a larger and stronger bank. Today, we are primarily sellers of home loans with a small portion of these on our books. This asset will now be much larger and will enjoy the advantage of low-cost funds sourced by a bank. We will add about 3500 people who will bring their expertise in a unique product and deep customer relationships. All these are key strengths. Yes, there will be some challenges in terms of integration, but these will be purely transitory in nature. We see it as a win-win for both entities and would like to believe that the potential merger will present far more opportunities than challenges. The two companies have a similar culture and value system.

What challenges do you see on the deposit side as a large portfolio of assets of an NBFC is moving to a banking entity? What will be the additional regulatory requirements in terms of CRR and SLR? Any capital raising plans in the near future?

The liabilities of HDFC Limited will mature over a period of time. That by itself acts as a cushion. Further, we have enhanced deposit mobilisation and with the expanded branch network backed by improved sales processes, we should be able to generate the deposits needed to fund the additional liabilities needed.

Also, both entities are extremely well capitalised. Post-merger, we would have one of the highest capital adequacy ratios in the industry and may not need to raise funds immediately. The bank will of course continue to raise debt in its routine course of business.

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

We cannot comment on a futuristic basis. But a pro forma balance sheet of the merged entity as on December 31, 2021, would have seen Mortgages comprise 33 per cent of the loans; Commercial and Rural Banking comprising 24 per cent; Retail Banking 21 per cent Corporate Banking 19 per cent and Construction Finance 3 per cent. The greater share of secured lending results in a more robust balance sheet. 


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