HDFC Bank, India’s largest private sector lender, plans to grow its advances at a slower pace than its deposits as it seeks to bring its elevated credit-deposit ratio back to pre-merger levels. Sashidhar Jagdishan, the Managing Director (MD) and Chief Executive Officer (CEO) of HDFC Bank, outlined this strategy in his address to shareholders in the bank’s annual report for FY24.
The former mortgage financier HDFC merged with HDFC Bank on July 1, 2023. “It is our endeavor to bring down the credit to deposit ratio to pre-merger levels and our focus would be to maintain adequate liquidity buffers, repay HDFC borrowings as they mature, including considering any prepayment opportunities that may arise, and pursue profitable sources of lending,” Jagdishan stated. He added, “During this time of adjustment, the bank will grow its advances a little slower than deposit growth. We will avoid pursuing growth that does not meet our risk-adjusted profitability thresholds, in line with the bank’s philosophy.”
Adjusting Credit-Deposit Ratio and Liquidity, HDFC Bank’s post-merger
HDFC Bank’s post-merger, the bank’s credit-deposit ratio has exceeded 100%, compared to around 87% pre-merger. Jagdishan emphasized that the merger has significantly altered the bank’s liability profile. “We are clear in our intent of pursuing profitable growth. The bank will continue to focus on granular deposit mobilization, leveraging our inherent distribution strengths and the execution focus that we are known for,” he said.
The Reserve Bank of India has repeatedly cautioned banks about the high credit-deposit ratio in the system. In a recent meeting with the chiefs of both public and private sector banks, Governor Shaktikanta Das highlighted the widening gap between credit and deposit growth. The regulator also suggested that banks revisit their business models in light of this disparity.
Jagdishan pointed out that, HDFC Bank’s post-merger, comparing with its past metrics might not be appropriate. “In many ways, it is now a new organization with a different balance sheet composition,” he explained. The merger has resulted in a higher proportion of borrowing at 21% compared to 8% pre-merger and a lower current account savings account (CASA) ratio. Key metrics of the new organization will thus differ from pre-merger levels.
Leveraging the Merger for New Growth Opportunities
The merger with HDFC Ltd. has opened new avenues for growth, particularly in the mortgage business. Jagdishan noted that around 85% of incremental home loan disbursals post-merger were to HDFC Bank savings account customers, a significant increase from the pre-merger level of 30-35%. This growth is attributed to the bank’s extensive distribution network, seamless integration of bundled journeys, and strong execution capabilities.
Jagdishan expressed pride in the bank’s ability to build a strong liability franchise by leveraging home loan customers. The bank offers a suite of financial products to its home loan customers, including credit cards, consumer durable loans, wealth products, and insurance. It is also seeing strong traction in savings accounts being opened with home loans. Moving forward, the bank will focus on cross-selling both bank and group products to home loan customers. “While we remain committed to an open architecture model, we do expect to distribute more of the subsidiaries’ investment and insurance products, leading to an increase in fee income,” Jagdishan said.
On the technological front, Jagdishan highlighted the bank’s ‘Shift Right’ strategy, which embraces technology as a growth catalyst. “Our vision is to shift from a product-centric approach to a customer-centric one through five transformation pillars built on modern technology constructs,” he added.
In summary, HDFC Bank’s post-merger strategy focuses on stabilizing its credit-deposit ratio, leveraging new growth opportunities, and embracing technology to enhance customer experience and profitability.
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