At bl.portfolio, we’ve flagged off several times that HDFC Bank is off its 20-per cent plus growth rate across all parameters. The trend continued in the December quarter FY23 (Q3 FY23) results as well, when net profit rose 18.5 per cent year-on-year to ₹12,698 crore. These numbers are beginning to align with the reset expectations and hence its stock price too reacted very neutrally to its results. This is also reflective of the present theme in the banking sector – that boring isn’t bad. Therefore, Q3 doesn’t spring any surprises to investors, and this is a big positive given that the mega-merger may be just a few months away. But more than the numbers, devil will lie in the details and there are three important aspects to note – loan mix, deposit accretion and bad loans as a precursor to the merger.

Read more: HDFC Bank Q3 PAT up 18.5% to ₹12,259.5 crore

Loan mix: HDFC Bank flipped from being a retail-heavy bank to corporate-heavy bank ahead of the pandemic. The merger with HDFC Ltd will remedy this issue, thanks to ₹4.46-lakh crore of pure retail mortgages getting added. Post the merger, the retail to wholesale ratio of HDFC Bank will once again cross the 50 per cent threshold, after dipping to less than 40 per cent in the last two years. But in the process net interest margin (NIM), a measure of profitability, may also get altered as HDFC Ltd’s book earns 3.5 per cent NIM, while that of the bank has historically been over four per cent (4.1 per cent in Q3). The bank is also aware of this reset and hence to prevent a sharper fall in profitability, it seems to have changed its approach to growth. For the first time in many quarters, the bank’s corporate book didn’t grow sequentially, though up 20 per cent year-on-year. According to its management, a few corporate loans which didn’t meet the rate of interest parameter were let go during the quarter. For a bank that was on the front-foot chasing top-rated corporate loans until recently, and led the pricing war, the dip in Q3 is an indication of efforts to protect NIM. To be sure, high-rated corporate loans aren’t high yielding in comparison to retail and slightly risky corporate loans. In Q3, much of the loan growth came from retail (mainly personal loans, home loans and gold loans), commercial and rural banking and agri-loans. What’s also noteworthy is that recouping the lost ground on credit cards hasn’t been easy, with this segment posting the weakest sequential growth of 1.6 per cent vis-à-vis retail loan segment’s 4.5 per cent quarter-on-quarter run rate. 

Deposit accretion: Loans and deposits grew at 20 per cent year-on-year respectively in Q3. While this neck-to-neck growth rate helps in preserving NIMs, one isn’t sure if the bank’s aggressive branch opening spree is yielding the desired fruits just yet. In Q3, HDFC Bank opened 684 branches, in line to meet its target of opening 1,500 branches in FY23. Branches were once seen as deposit-generating sources. Today, deposits are flowing more through digital channels for the banking system, and the dependence on branches has reduced a bit. Therefore, the theory of branches lead to deposits may play out in the long term, rather than immediately to mitigate the issues of the merger.

Bad loans: HDFC Bank saw six per cent year-on-year decline to about ₹2,800 crore in Q3 in provisioning costs. Gross NPA stood stable at 1.2 per cent, though slippages ratio increased 36 bps year-on-year to 1.9 per cent led by agri-loans. Yet, the quarter was quite strong in terms of asset quality. However, it may be too early to extrapolate this trend into FY24 because mergers result in some balance sheet clean-up and the likelihood of this reducing provisioning cost trend may not be sustainable.