“HDFC Bank’s Q3 Management Call Insights: Unveiling HDB Financial IPO and Distribution Network Strategies”

HDFC Bank, India’s largest private sector lender, has reported robust financial performance in the third quarter of FY24, showcasing substantial growth in net profit and net interest income (NII). The bank’s strategic decisions, management insights, and future plans were discussed in detail during the post-earnings call, shedding light on various aspects such as the listing of subsidiary HDB Financial Services, liquidity management, loans and deposits, distribution network expansion, and asset quality.

Financial Performance Overview:

In Q3 FY24, HDFC Bank exhibited a strong financial performance, with a remarkable 33% YoY growth in net profit, reaching ₹16,372 crore. The net interest income (NII) for the same period rose by 24% YoY to ₹28,470 crore, indicating a healthy expansion in the bank’s core interest-earning operations.

Despite a challenging economic environment, HDFC Bank recorded a 4% QoQ increase in loans and a 2% growth in deposits. The loan-to-deposit ratio (LDR) rose to 110.5% QoQ, reflecting the bank’s continued focus on expanding its lending portfolio.

However, a notable development was the Liquidity Cover Ratio (LCR) falling to 109.8% from 120% QoQ. This dip was attributed to a drawdown of liquid assets to fund the loan growth, indicating a strategic move by the bank to deploy its liquidity for business expansion.

HDB Financial Services Listing:

One key highlight from the post-earnings call was HDFC Bank’s plan to list its non-bank finance subsidiary, HDB Financial Services. As of now, HDFC Bank holds a 94.7% stake in HDB Financial Services, which operates as a non-deposit-taking NBFC offering a diverse range of loans and asset finance products. The bank’s Chief Financial Officer, Srinivasan Vaidyanathan, emphasized that they have time until September 2025 to initiate the listing process, and preparatory work for the IPO will commence shortly.

The decision to list HDB Financial Services aligns with the bank’s strategy to unlock value from its subsidiaries and diversify its sources of capital. The move is expected to provide investors with an opportunity to participate in the growth potential of the non-bank finance sector.

Liquidity and Loan Funding Strategy:

Addressing the liquidity situation, the CFO highlighted the bank’s plan to reduce the Loan-to-Deposit Ratio (LDR). Going forward, incremental loans will be funded entirely by deposits, and the bank aims to ensure that deposits grow at a faster pace than loans. Despite the temporary dip in the Liquidity Cover Ratio, which currently stands below 110%, the bank plans to maintain it in the range of 110-120% in the future.

This strategic shift indicates a focus on optimizing the balance between liquidity management and loan growth. By relying more on deposits for funding, HDFC Bank aims to enhance its stability and ensure sustainable growth in its lending activities.

Loans and Deposits Strategy:

Management underscored the profitability of retail unsecured products and expressed a desire to grow this segment. The management believes that the delinquencies and non-performing assets (NPAs) associated with retail unsecured products are better than those of the secured book. As a result, there is an aspiration for high-teens to 20% growth in the retail unsecured products book.

Additionally, there is a strategic push to increase the share of non-mortgage retail loans, as these are considered margin accretive. The management believes that addressing the deficit in system liquidity is a critical factor for deposit growth. Despite facing challenges such as slower growth in Savings Account (SA) deposits compared to Current Accounts (CA) deposits, the bank is confident in gaining incremental market share.

To improve the Current Account and Savings Account (CASA) ratio, the management expects a positive shift once customer spending reduces in the coming quarters. This insight reflects a forward-looking perspective, considering the dynamic nature of consumer behavior and market conditions.

Distribution Network Expansion:

An integral part of HDFC Bank’s growth strategy is the expansion of its distribution network. In Q3 FY24, the bank added 146 branches, bringing the total number of branches to 8,091. Furthermore, there are plans to add a maximum of 1,000 branches by the end of FY24, with an emphasis on maintaining a proper mix of Urban and Non-Urban Centers (URCs and non-URCs).

This expansion strategy goes beyond merely increasing the number of branches; it also involves enhancing geographical presence. The bank recognizes the importance of having a well-distributed network to cater to a diverse customer base, thereby solidifying its position as a leading private sector lender.

Asset Quality and Provisions:

HDFC Bank’s asset quality demonstrated improvement, with the Gross Non-Performing Assets (GNPA) ratio declining by 8 basis points to 1.26% in Q3 FY24. Of this, 15 basis points pertain to standard assets, indicating a robust portfolio.

The slippage ratio for the quarter stood at 26 basis points (non-annualized) or ₹70 billion. Noteworthy is the fact that recoveries and upgrades amounted to ₹45 billion, outweighing the write-offs of ₹31 billion. This reaffirms the bank’s proactive approach to managing its asset quality and ensuring timely resolution of potential credit issues.

Total provisions, including contingent and floating provisions, stood at ₹154 billion as of Q3 FY24. These provisions serve as a buffer against potential future losses, reflecting the bank’s commitment to maintaining a robust risk management framework.

Market Reaction:

Despite the positive financial performance and strategic insights shared during the management call, HDFC Bank’s shares experienced a 5.77% decline at 10:15 am, trading at ₹1,582.00 apiece on the BSE. The market reaction could be influenced by various factors, including broader market trends, investor expectations, or specific considerations related to the banking sector.

In conclusion, HDFC Bank’s Q3 FY24 results and management call provide a comprehensive view of the bank’s financial health, strategic initiatives, and future plans. The focus on liquidity management, loans and deposits strategy, distribution network expansion, and asset quality underscores the bank’s commitment to sustained growth and resilience in a dynamic financial landscape. Investors and stakeholders will closely monitor the execution of these strategies and the impact on the bank’s performance in subsequent quarters.