As HDFC looks to maintain growth, merger remains on track

In its earnings call, HDFC’s management said that the merger is on track. The National Company Law Tribunal (NCLT) hearing is scheduled for today. Post this, certain regulatory requirements need to be taken care of. 

Analysts at Macquarie Capital Securities (India) believe the company is taking the right steps ahead of the merger to ease integration with HDFC Bank eventually. “It has run down a certain proportion of the loan book non-compliant with commercial banks as it prepares for the merger with HDFC Bank,” they said in their Q3 earnings review report.

As such, Q3 results fell short on certain aspects. For instance, the non-banking financial company’s assets under management (AUM) grew at a healthy pace of 13% year-on-year (y-o-y), but the growth was lower compared to 16% seen in the September quarter. This could be attributed to the construction finance portfolio. But the management is confident that the company has a good pipeline and loans could get disbursed in the coming quarters.

Another point to note was HDFC’s loan book is dominated by individual loan portfolio which constitutes about 82% of the total AUM. It reported a growth of about 17% y-o-y. This segment also witnessed a slowdown in growth from 20% in the September quarter. But the underlying demand for house properties is strong and therefore bodes well for the company. The management attributed this to a temporary sentiment owing to rising interest rates and the same is likely to pick up in the coming quarters.

Third, the company’s operating expenses were higher and according to the management this was on account of higher staffing and legal expenses. According to a ICICI Direct Research first cut results note, “Opex growth came in higher at 19.4% y-o-y. This is attributable to up fronting of staffing expenses. Hence, cost to income ratio up at 10.3% vs 9.7% in Q3FY22 and 9.1% in Q2FY23″.

On the positive side, the profit, and net interest income (NII) grew to about 13% y-o-y each. The net interest margin (NIM) though was steady at 3.5%, it was marginally lower by 10 basis points compared to the previous quarter, mainly on account of rising cost of funds. However, it was within the range of the management guidance of maintaining at 3.3%-3.5%. One basis point is 0.01%.

The management also stated that the repricing of loan books tends to happen with a one-quarter lag, while the borrowing happens immediately for the company. As such, it is expected that the company’s margin will see improvement in the coming quarter. In terms of asset quality, the company was in good stead.