'Our franchise is solid; nothing can stop this juggernaut': Top HDFC Bank sources

HDFC merged with HDFC Bank on July 1, 2023

Days after the bank’s stock was pummelled after its disappointing numbers, top executives at HDFC Bank, speaking exclusively to CNBC-TV18, said they are confident that the bank’s deposit and loan-generating capacity remains solid and that it will return to its old trajectory in the medium term.

"Our franchise is solid, the team is working hard, and our vision is clear," said one of the top executives to CNBC-TV18. "There will be road bumps, but nothing can stop this juggernaut," he added, speaking on condition of anonymity.

A key takeaway from these bankers is that margins will be given top priority. They said they may allow some asset sales to substitute the maturing deposits of the old HDFC. One of the bankers we spoke to explained that as the old HDFC borrowings get replaced with bank deposits, margins will rise. "We will give top priority to margins," he said, importantly adding that they may substitute some of the high-cost borrowing with the asset sale. "Optically, advances may be lower, but I won't demotivate my team."

When reminded of MD Sashi Jagdishan’s promise that "the bank will create an HDFC Bank every four years," the bankers said that goal remains intact. One of them pointed out: "We are only two quarters into the merger; we have till 2027." He explained that their growth plans faced a bump because of the RBI’s liquidity tightening policy, which may continue for the next few months.

Another top honcho pointed out that the bank still accounts for 19% of incremental deposits created in the banking system as of December end, and this is true for the last nine months and the last few years.

The first banker pointed out that HDFC Bank has had a certain growth trajectory for 20 years, but with the merger on July 1, "it's a new starting point." For six lakh crore rupees of assets, the bank had zero CRR (cash reserve ratio). Also, while the erstwhile HDFC Bank had only 8% of its funds in the form of borrowings, with HDFC's merger, borrowings shot up to 21%, and so the cost of funds rose.

"We are going to reclaim the old pace, but we don't want to box ourselves into a number," he said when asked to guide on margins. "But we are sure of the direction: on a secular basis, our margins will rise from 3.4% to 3.5% and so on," he said.

The bankers also pointed out that, like HDFC Bank’s deposit-creating ability, its ability to create quality is also best in class. "Our USP of credit quality remains and will be visible when the cycle changes," he said, adding that now all banks show good asset quality because of a goldilocks point in the cycle. "We will stand out when the cycle turns," he said.

A part of the disappointment with HDFC Bank's Q3 numbers also came from the fact that the bank said it would open only around 900 branches, against an earlier promise of 1500 branches. The second banker we spoke to said that the market is probably linking the branch opening to the bank's ability to create deposits. He explained that there is no such link. "In fact, new branches don’t give us much deposit; branches older than 10 years give us 10 times the deposits a new branch gives us; branches over 15 years old give us 25 times the deposits," he said.

He explained that the opening of branches is getting stymied by an RBI requirement that 25% of incremental branches should be opened in unbanked areas, and as of now, there is no clear data on unbanked areas. "One belief is that there are no unbanked left. India is pretty much adequately banked by a branch or BC. That’s one area with which we are grappling and waiting for clarification from RBI."

Part of the reason for the HDFC Bank stock's near 15% fall was because of ambiguity over SEBI’s rule that FPIs with more than 50% exposure in one group and those with over $3 billion in assets have to disclose all their beneficial owners. SEBI has since clarified that this rule doesn’t apply to FPIs that have concentrated exposure in a company with no identifiable promoter, like HDFC or ICICI groups. But the bankers said this intent has not been put in black and white and so there is confusion at the depository’s end. In fact, some of our foreign fund investors have written to us, asking us to get clarity from SEBI," said one of the bankers.

To sum up, HDFC Bank's 8,000 branches are raring to go to originate loans and liabilities, the bankers said. The India growth story is robust, and like in the last 25 years, in the next 25 too, we will double every four years, short-term gyrations notwithstanding.