HDFC Bank’s investors have one eye on NIM another on merger


There were no fireworks in the December quarter (Q3FY23) earnings performance of HDFC Bank Ltd. The private sector lender’s net interest income rose 24.6% year-on-year, partly aided by interest on income tax refund. Loan growth was driven by the retail segment, compensating for the weak wholesale (corporate) segment. Asset quality was stable, but the net interest margin (NIM) was sequentially flat.

As the impact of re-pricing deposits kicks in, akin to peers, the bank’s NIM would also see some pressure. In the Q3 earnings call, the management indicated that the increase in cost of funds is likely to be offset by a shift in its portfolio mix towards high-yielding retail loans. While the worry on NIMs is not unique to HDFC Bank, a crucial short-term trigger for the stock is the completion of the merger with its home loan giant parent HDFC Ltd.

A multi-quarter high

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A multi-quarter high

The merger process is progressing and the National Company Law Tribunal’s final hearing is scheduled on 27 January, the management told analysts in the call. While the bank’s management is hopeful of completing the merger before the guided timeline, clarity on a slew of important aspects is still awaited.

“The regulator’s view on key issues (like stake in HDFC Life; approval to keep HDB Financial Services as subsidiary; any regulatory dispensation on priority/SLR/CRR, etc) would be important events for the bank in next three-six months,” said analysts at PhillipCapital (India) in a report.

Indeed, nervousness around the merger has capped a significant upmove in the stock. In CY22, the HDFC Bank stock rose 10%, lagging the Nifty Private Bank Index. “The stock is likely to start reviving gradually as the merger-related overhang is out of the way. After NCLT’s nod, the transition process would be important,” said Nikhil Shah, an analyst at Nirmal Bang Institutional Equities.

The benefits of this merger would reflect over a period of time; in the meantime, merger-related costs are feared to weigh on the bank’s margins and cost-to-income ratio. The return on equity is expected to moderate in the near term owing to low leverage of the parent, said the PhillipCapital report.

Meanwhile, the competition to garner deposits is likely to get intense among banks. In a bid to give its deposit growth a boost, HDFC Bank has been in a branch expansion mode. This bodes well for the bank’s medium-term growth. For now, it has kept its operating expenses elevated; so, the movement in this metric would be among the key monitorables.

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