HDFC Bank merger process with HDFC Ltd on track; outlook positive!
HDFC Bank's analyst meet day offered insights on the ongoing merger of HDFC Bank with HDFC Ltd along with its long term vision.
In more than a decade, HDFC Bank has delivered sustainable business growth (more than 20% CAGR) coupled with prudent asset quality across cycles (GNPA at 0.9-1.3%) and consistently higher return ratios (RoA at 1.8-2%) aided by continued focus on building physical and digital capabilities along with customer acquisition and experience. Recently, the bank announced a merger with parent HDFC Ltd, given regulatory convergence and market development, which has improved the risk-reward proposition.
With the merger advancing ahead, HDFC Bank aims to double its balance sheet in the next five years, exhibiting growth of ~15% CAGR. Expanding physical presence (plan to double branches in the next three years), focus on digital capabilities (plans to change tech stack in three to four years), enhancement of product ecosystem for better customer experience, push in newer segments (MSMEs) and geographies (rural & semi urban areas) are seen enabling the bank to achieve targeted growth and profitability. In the initial phase, deposit mobilisation and improving reserves (including CRR, SLR and PSL) should be in focus while credit growth is expected to follow keeping return ratios trajectory unabated. Long term vision, post-merger, is to provide asset diversification with reduced cyclicality, create long term customer relationship (through deposits mobilisation led by branch expansion) and provide cross-sell opportunity (to existing HDFC Ltd customers). The management is confident of delivering sustainable growth and accretive return ratios post-merger, though volatility on NIMs and opex ratios cannot be ruled out. Overall, strong core fundamental and scalability with focus on technology remain strengths though execution and sustainable headway remain key enablers.
On the valuation front, the current price seems to be factoring in near term merger related volatility though given core fundamental strength with historical track record and long term vision, we remain positive on the stock.