Snippets From HDFC Bank Concall

Flagbearer of Indian Private Banking Space HDFC bank has been grabbing a lot of headlines recently and its counter is on a freefall for a multitude of reasons. Sharing some snippets from the con calls to have a better understanding to have a broad understanding regarding the internal dynamics of the organization. Merger with its parent HDFC and a change in leadership apparently is taking a toll and the lender is in a transition phase.

Deposit Base: Granularity of deposit base is warranted in any leading scheduled commercial bank. Considering the fact that RBI has hiked the Repo, the policy rate by 250 basis points and it's getting reflected in the elevated cost of funds for the banking sector which in turn is crimping the margin for the lenders and HDFC is not immune to that. Even though its incremental market share in deposits is around 20%, much is desired on this front. Clients are far more inclined towards booking Term Deposits which is costly from the bank's point of view.

System Liquidity: RBI has adopted a "withdrawal of accommodation" stance. As of this particular juncture market is in deficit to the tune of Rs. 3.34 lakh crore, a staggering amount. Reasons which are primarily attributed is slow government spending and monthly GST payments.

Branches: Cost to Income ratio has been at elevated levels. HDFC has decided to tap into the resources of India's tier 2,3,4 cities and wants to expand its footprint beyond metros. This would lead to manpower costs and lease expenses too. Vintage of the bank branches need to be considered too. The break-even period of the branches is around 3 years. Around 60% of the branches are less than 10 years.

Product Mix: HDFC bank's mortgage book has multiplied manifolds due to the merger exercise its margin is dilutive by nature and the mortgage is a secured product. That is going to have a bearing on the margin quotient. In order to enhance the margin profile bank has decided to shift its focus to the Retail product.

Merger Synergy Benefits: One of the rationales of the merger was the prevailing cross-selling opportunity as it was proven nearly 70% of HDFC customers don't bank with HDFC bank. Benefits are accruing in a gradual manner. More to come in the coming days.

Cost to Income ratio: Merger is taking its toll on the elevated Cost to Income ratio and as of this moment it's hovering around 40%, and their intention is to bring it down to around 30%. Ultimately it would reflect in the ROA and ROE in the coming days, PPOP(Pre Provisioning OPerating Profit) should first reflect that.

Credit to Deposit Ratio: RBI has been flagging concern regarding the systemwide issues of Credit to Deposit ratio of more than 100% as Credit growth is outpacing the deposit growth for the time being. Unsecured Loans, consumer durable, consumption-oriented loans are growing at a scorching pace and RBU has already increased the risk weights of the loan assets.

Pricing: Management has made it abundantly clear that they have no intention of playing the pricing game in order to garner deposits, and the price-sensitive wholesale deposit segment is something they are not willing to venture.

Commercial and Rural banking: Setting up branches and tapping into the demands of "Bharat" has been working well for them as is clearly evident from the growth numbers and its yield is accretive in nature.

Asset Quality: HDFC has always taken pride in having a robust risk management system at its disposal and they always churn out industry-leading numbers in terms of GNPA and Credit Cost.

RBI's concern regarding unsecured loans has been taken into consideration and remedial steps have already been incorporated. Their primary focus is the pre-approved customers.

In order to demand premium valuation one must churn out flawless numbers each and every time, over and over again, we need to see whether they would be able to replicate it in the coming days.