HDFC Bank Sees Asset Quality Worsening Marginally After Merger

The asset quality pain largely comes from HDFC Ltd's corporate loan book and is likely to settle in a couple of quarters

<div class="paragraphs"><p>An HDFC Bank branch in Mumbai. (Source: BQ Prime) </p></div>
An HDFC Bank branch in Mumbai. (Source: BQ Prime)

India's largest private bank HDFC Bank Ltd. is likely to see its bad loan ratios worsen marginally, after the merger with Housing Development Finance Corporation Ltd.

Gross non-performing asset ratio is likely to increase to 1.4% as of July 1, compared to 1.2% as of June 30, Srinivasan Vaidyanathan, chief financial officer of HDFC Bank told sell-side analysts on Monday. In a presentation, the bank also noted that the net NPA ratio will rise to 0.4%, from 0.3% at the end of the first quarter.

The rise in bad loans is owing to HDFC's non-retail housing loan portfolio where the gross bad loans are at 6.7% as of July 1.

"There are certain non-individual accounts that the bank’s risk assessment is not comfortable in holding," Vaidyanathan said.

As of March 31, HDFC's total loan book stood at over Rs 6 lakh crore, which included Rs 4.99 lakh crore worth retail loans and Rs 1.15 lakh crore worth loans extended to corporate bodies.

The bank holds adequate provisions against such loans, the bank's CFO said. As of July 1, the provision coverage ratio for the combined entity is at 74%, compared to 75% as of June 30.

Currently, the non-individual loan book is reducing and it will be a couple of quarters before the book stabilises, Vaidyanathan told analysts.

On July 1, the two entities merged creating the second-largest bank in India. The cumulative loan book stood at over Rs 22 lakh crore, only behind State Bank of India in asset size. Analysts believe that the increase in balance sheet size could hamper future growth.

"...we estimate the same to grow by 12% over the remaining 9MFY24 as the unwind in non-individual book of HDFC Ltd will continue for couple of more quarters," Nitin Aggarwal of Motilal Oswal said in a short note on Tuesday.

During the first quarter, right before the merger, HDFC Bank saw its loan book rise 15.7% year-on-year to Rs 16.3 lakh crore.

Going ahead, the bank is likely to see a compression in net interest margins, owing to the liquidity surplus from the mortgage financier. As of June 30, HDFC Bank reported NIM of 4.3%, which is likely to fall to 3.9-4% post the merger.

"This (excess liquidity) along with ICRR (incremental cash reserve ratio) will drag near-term NIMs...Impact will normalise from FY25 as liquidity gets deployed & ICRR ends this month," Jefferies said in a note on Tuesday.

Jefferies reduced HDFC Bank's target price from Rs 2,100 a share to Rs 2,030. It however retained its buy rating on the stock.

Going ahead, the bank will focus on growing its retail deposit book faster, rather than any wholesale deposits, Vaidyanathan said.

"If you do non-retail the run-off on LCR (liquidity coverage ratio) could be anywhere from 40-100%. So there's pretty high kind of LCR requirements which are there for non-retail. Granular retail deposits is where our interest is in terms of growth. Retail can have anywhere between 5-10% of outflow," he said.