HDFC Bank had to let go of a lending opportunity worth Rs ₹1 lakh crore in the wholesale business, of which ₹30,000 crore was foregone in Q1 FY24, due to unattractive pricing on the back of intensifying competition including from PSU banks.

On a whole, HDFC Bank expects loan growth to remain healthy with the aim of doubling the balance sheet in four years, it said in a meeting of the top management with Motilal Oswal Securities.

Liquidity build-up

“The recent liquidity build-up (via HDFC Ltd balance sheet) places the bank well to pursue growth in FY24 without worrying much on the funding side. Good momentum in the mortgage business and improved cross-selling will boost growth in retail assets, while stable traction in MSME will help it maintain overall broad-based growth,” the brokerage firm said in a note, pegging loan growth for the merged entity to sustain at 12 per cent over the remaining FY24. It expects loan CAGR will recover to 17 per cent over FY24-FY26.

The private sector lender plans to open 1,400-1,500 branches in FY24, taking the total count to 13,000-14,000. This is in addition to the 500 branches of erstwhile HDFC which will be scaled up over the year.

Over 90 per cent of the new branches are on track to meet business goals and deposit accretion will remain a focus area of the bank as the key source of funding, whereas that of affordable housing and infrastructure bonds will be limited, it said.

With respect to elevated NPAs in HDFC’s wholesale portfolio, HDFC Bank said it expects recoveries to be robust over the coming years even as unwinding of the wholesale book continues in the near term. Gross NPA of HDFC’s non-individual portfolio was 6.7 per cent as of July 2023.

The bank has also made higher general and contingent provisions of ₹3,900 crore and specific NPA provisions of ₹3,800 crore to maintain the strength of the merged balance sheet due to differences from HDFC’s provisioning.

Priority sector lending

HDFC Bank said that it may not be easy for priority sector lending (PSL) targets in select segments like Small and Marginal Farmer, but that it is well positioned to comply with overall PSL requirements and deliver 2 per cent RoA in the medium term.

“While the merged entity is expected to begin its journey on a softer note, we expect the operating performance to recover gradually from H2 FY24 onwards. We expect margins to recover to 3.8 per cent by FY26 and expect improvement in cost ratios, which should enable around 21 per cent CAGR in PPoP (pre-provisioning operating prodit) over FY23-FY26, leading to RoA/RoE of 2/17 per cent by FY26 (reaching back to pre-merger levels),” the note said.