HDFC Bank needs to maintain the tempo in deposit growth
In the past two days, HDFC Bank Ltd’s shares are up 3%. The private sector lender’s June quarter (Q1FY24) results announced during market hours on Monday showed healthy loan (credit) and deposit growth of 15.8% and 19.2% year-on-year (y-o-y).
With the merger of HDFC Bank and HDFC Ltd effective from 1 July, the focus from Q2 onwards will turn to the combined entity’s performance. For the merged entity, the pace of deposit mobilisation momentum is crucial. While the fight for deposits is prevalent across the sector, for the merged bank, it would play a key role in achieving its loan growth going ahead. Here, a pick-up in retail deposits would be worth tracking, as they are sticky in nature.
As such, all eyes will be on deposit growth. “The deposits of HDFC Ltd will become term deposits for the bank, while the other liabilities will be classified as borrowings of the merged entity,” Dnyanada Vaidya, research analyst-BFSI, Axis Securities, said. “We believe, the merged entity remains well placed to deliver healthy loan book growth led by the retail; and commercial and rural banking segment.”
The merged bank’s proforma data shows that retail deposits account for 83% of the overall deposits in Q1. And the total deposits have grown by 16% y-o-y. While the deposit growth may be slower, HDFC Bank’s branch expansion strategy across cities could help here. With some branches maturing, operational efficiencies could aid in deposit and loan growth.
Further, the merged entity’s LDR (loan-deposit ratio) stands at 109% in Q1. The bank aims to bring it to the standalone level (84-85%) in three-four years. “This would necessitate strong deposit growth, for which HDFC Bank is banking on expanding distribution (aims to double branches over FY22-25) and deepening engagement with customers while keeping deposit pricing competitive,” said analysts from ICICI Securities Ltd in a report on 18 July.
The management expects loan growth to be within the range of 17-18% in the medium term. With the change in deposit mix, the cost of funds in the near-term is expected to increase. This could lead to net interest margin (NIM) compression. In Q1, HDFC Bank was able to maintain stable standalone NIM at 4.1% despite the increase in cost of funds.
The merged entity’s financials will be available from Q2 onwards. In the near term, investors will closely track how the merger transition is shaping up, whether operating costs remain elevated and if margins moderate.
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Updated: 18 Jul 2023, 09:02 PM IST
