HDFC Bank Q2 results: Lender sees drop in margins, rise in NPAs post mega merger with HDFC

HDFC Bank Ltd, which reported its second quarter results on Monday, reported sharp sequential drop in its lending margin and an increase in bad loans for the September quarter as it reported results as a single company for the first time since mega merger with parent Housing Development Finance Corp (HDFC).

HDFC Bank merged with HDFC on July 1 in a $40-billion deal to better tap rising demand for credit.

Net interest margin at India's largest private lender fell to 3.4% on all assets and 3.6% on interest-earning ones. Net interest margin (NIM) came in at 4.1% in the June quarter.

Organically, the merger of two entities would have translated into margins of 3.6%-3.7%, but additional liquidity held ahead of the merger resulted in a hit of 30-35 basis points, the bank's chief financial officer Srinivasan Vaidyanathan said in a conference call with media.

Vaidyanathan did not say what margins would be in the next few quarters.

Vaidyanathan told reporters that the NIMs will rise as the share of higher-yielding assets goes up and once it replaces market borrowings of nearly Rs 4.8 lakh crore taken to execute the merger with cheaper deposits.

The bank said there was a “debt-funded cost for the additional liquidity and merger management” which was a drag on the NIMs during the quarter.

The bank's gross non-performing assets (NPA) ratio rose to 1.34%, which included the impact of Rs 4,500-Rs 5,000 crore in loans restructured from the HDFC loan book. These restructured loans were categorised as non-performing as per current regulations, Vaidyanathan said.

The bank's gross NPA ratio was 1.17% in the fiscal first quarter prior to the merger.

The gross NPA ratio was lower than the 1.41% for the combined entity on a pro forma basis at the end of the June quarter, the bank said. The bank has provided adequately for stressed loans and net bad loans, after provisions, rose 5 basis points to 0.35%.

Gross loans were at Rs 23.55 lakh crore, up 4.9% from the previous quarter on a like-to-like basis, the lender said. Post the merger, retail loans form 55% of the loan book.

However, the credit environment in the country is "benign" and the bank will continue to grow at a pace higher than the broader industry, Vaidyanathan said.

Deposits aggregated to about Rs 21.73 lakh crore at the end of September, a 5.3% increase from June-end on a comparable basis.

Post merger, 55% of loan book is retail loans while 45% is wholesale loans, he said and added that there are no plans to list HDFC Securities as of now.

“Impact of I-CRR on NIMs was around 5 to 10 basis points,” Vaidyanathan said.

On August 10, the RBI mandated banks to maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023.

The measure was intended by Reserve Bank of India to absorb the surplus liquidity generated by various factors, including the return of Rs 2,000 notes to the banking system.

The central bank, on September 8, took the decision to discontinue the I-CRR in a phased manner, after the review.

On a standalone basis, HDFC Bank reported a net profit of Rs 15,976 crore.

According to him, NPAs would have been lower by 0.22% if there was no regulatory mandate to recognise erstwhile HDFC Ltd’s non-individual restructured assets as NPAs.

There has been a positive impact of the merger on the provisions as a bulk of the assets transferred from HDFC are secured, he said.

The overall provisions during the quarter came at Rs 2,903 crore as against Rs 3,240 crore in the year-ago period.

The cost to income ratio improved to 40.4% as a merged entity riding on HDFC’s low numbers, and Vaidyanthan said that the aim is to get it to mid-30s as part of a long term vision.

To a question on the regulatory caution on the unsecured assets, he said the bank’s risk management teams are aware of the developments and added that a lot of the issues in the industry are from small-ticket loans which the bank does not play in.

Sale of the education loans-focused Credila is yet to be completed, Vaidyanathan said.

Regarding the top management’s vow to double the size in three-four years, Vaidyanathan said distribution strength, brand and people will make faster growth possible.

The bank hired 16,000 people on a net basis during the September quarter to take the overall staff strength to 1.98 lakh, he said.

With inputs from agencies