There were no fireworks in HDFC Bank Ltd’s December quarter (Q3FY23) earnings performance. The private sector lender’s net interest income rose 24.6% year-on-year, partly from interest on income tax refunds. Credit growth was boosted by the retail segment, offsetting a weak wholesale (corporate) segment. Asset quality was stable, but net interest margin (NIM) was flat sequentially.
As the impact of re-pricing deposits is similar to that of peers, the bank’s NIM will also see some pressure. In the third-quarter earnings call, management indicated that the increase in cost of funds was likely to be offset by a shift in its portfolio mix toward higher-yielding retail loans. While concerns over NIM are not unique to HDFC Bank alone, an important short-term trigger for the stock is the completion of its merger with home loan giant parent HDFC Ltd.
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The merger process is progressing well and the final hearing at the National Company Law Tribunal is scheduled for January 27, the management told analysts in the call. While the management of the bank is hopeful of completing the merger before the stipulated timeline, clarity on several important aspects is still awaited.
“The regulator’s view on key issues (such as HDFC Life stake; HDB Financial Services approval as a subsidiary; any regulatory regime on priority/SLR/CRR, etc.) will be key developments for the bank over the next three-six months ,” analysts at PhillipCapital (India) said in a report.
In fact, jitters about the merger have capped the stock’s significant gains. In CY22, HDFC Bank stock gained 10%, underperforming the Nifty Private Bank index. “The stock is likely to revive gradually as the merger related overhang is out of the way. Nikhil Shah, an analyst at Nirmal Bang Institutional Equities, said post the NCLT nod, the transition process would be crucial.
The benefits of this merger will be visible over a period of time; Meanwhile, costs related to the merger are expected to weigh on the bank’s margin and cost-to-earnings ratio. The return on equity is expected to moderate in the near term due to the low leverage of the parent company, said the FilipCapital report.
Meanwhile, the race among banks to raise deposits is likely to intensify. To boost its deposit growth, HDFC Bank has been in a branch expansion mode. This augurs well for the medium term growth of the bank. For now, it has kept its operating expenses high; Therefore, speed will be one of the key monitorables in this metric.
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