‘This is a transition period...’: HDFC Bank CEO Sashidhar Jagdishan promises profitable growth despite merger impact

HDFC Bank CEO Sashidhar Jagdishan has assured a profitable growth trajectory for India’s largest private-sector bank despite the merger with the housing finance company HDFC Ltd affecting some of the bank’s metrics.

In an interaction with Rahul Jain, managing director of global investment research at Goldman Sachs India Securities Pvt Ltd, Jagdishan gave an overview of the loans and deposits in HDFC Bank’s balance sheet post the merger.

“Over the last seven quarters, the last quarter being the seventh, if you take the six quarters, ever since we announced the merger, we realised that with the merger will come a preponement of loans in our balance sheet, which is pretty much reflected in the constitution of the share. We now have around 14 to 15% share of loans on the stock of our balance sheet as against to 10 to 11% of deposits,” Jagdishan said.

The HDFC Bank CEO suggested it was understandable why the housing finance company had less deposits.

 “Obviously, they [HDFC Ltd] did not have too much of deposits, was more wholesale or bond funded. Rightfully so, because it was a long-term book and they wanted to have a very matched duration. So they sort of managed it pretty well. Now, that is completely new to us. Obviously, that is something which has now come in,” he said.

 “We realize that effectively we have to prepone the loan growth. So I need to now have that period of, I would say transition time, to warm up the engine to raise that amount of equivalent, granular sustainable funding to be able to substitute some of the bond maturity. So that I can have a reasonable amount of share moving up and matching with that of the loan market share,” he added.

Jagdishan said that this process would take time and also depend on monetary policy. But despite all these aspects, he sees the bank continuing the path of profitable growth simply by repayment of high cost borrowings.

“Obviously, it's not going to happen overnight. It's kind of a glide path that we will be seeing. In the meantime whatever I raise, if I raise a lot more then I'll have enough to maintain reserves, I'll have enough to pay off bond maturities or the loan maturities that will come up and the balance will be deployed.”

“If I have constraints of the monetary policies, of the liquidity situation in the system being rather tight, to that extent it'll be much lower. But yet just by repayment of the high cost borrowings you will see the trajectory of profitable growth continuing.”

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He described the current status of the bank as one of transition where some of the metrics can be ignored.

“This is the period of transition we will have to adjust to. So our anchor is that as a company for 29 years we have always been consistent on the bottom line growth, which you can call it the earnings per share or whatever that is. Going forward too, we will have that as an anchor. So a lot of other metrics you may want to sort of ignore because of the transition especially on the loan growth, and that could be a tad low but that's all right. That is something that is not going to be at the cost of my earnings trajectory.”

Jagdishan touched on the process of managing the bank’s loan-to-deposit ratio post the merger with the housing finance company. LDR compares a bank’s total loans to its total deposits for the same period, and is critical to assess a bank's liquidity.

“The LDR is one of important aspects of any bank’s asset liability committee, and so the management. If you remove the merger, we have been operating our loan deposit ratio in a reasonably healthy range of around 85-90% or 80-90% depending on which year it is and it's a long-term average. The growth rate in our deposits and loans have been on very similar pace therefore you could maintain that kind of a LDR.”

Describing the effort to manage LDR as “one of the most important deployment strategy”, Jagdishan said the bank would strive to maintain similar LDR range going forward.

“Obviously, with the merger, which I'm sure even the regulator would recognise that there's a foreign body which is coming with a certain amount of a metrics or a business mix. So, what we have inherited is something that we have to accept. Incrementally, what I do from here on leave aside what we did in Quarter 2 and Quarter 3, that is already baked in, now going forward whatever we do will be very similar to what we have done in the past, which means that we'll maintain a very healthy incremental LDRs.”

He said the bank would also maintain a healthy liquidity coverage ratio (LCR). The metric measures a bank's ability to meet its short-term cash outflows during a period of financial stress.

“And the reverse of LDR is the LCR. So, effectively, when you have this kind of a strategy, automatically your LCRs will be in a very healthy band. We've always operated between 110 to 120% and I think that's a very respectable and a very healthy level for a size of our bank, which provides you adequate cushion in terms of any emergent needs,” Jagdishan said.

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