During his discussion with Rahul Jain, managing director of global investment research at Goldman Sachs India Securities Pvt Ltd, Jagdishan provided insights into the loans and deposits within HDFC Bank’s balance sheet following the merger.
HDFC Bank CEO Sashidhar Jagdishan regarding the bank’s ability to maintain a profitable growth trajectory, despite the merger with HDFC Ltd, a housing finance company, impacting certain metrics of the bank.
Jagdishan briefed Rahul Jain, MD of Global Investment Research at Goldman Sachs India Securities Pvt Ltd, on HDFC Bank’s loan and deposit status post-merger.
Jagdishan noted that in the seven quarters, particularly the last six since announcing the merger, HDFC Bank observed an accelerated presence of loans on its balance sheet, affecting share composition.
The HDFC Bank CEO highlighted that HDFC Ltd primarily relied on wholesale funding or bonds rather than deposits, which suited its long-term lending focus. This strategy ensured a matched duration for their assets and liabilities. However, this approach is new to HDFC Bank following the merger.
The HDFC Bank CEO acknowledged the need to accelerate loan growth, requiring a transitional period to secure sustainable funding. This transition aims to substitute bond maturity with granular funding, ensuring a balance between loan market share and the bank’s overall share structure.
Jagdishan emphasized that this transition process will require time and will be influenced by monetary policy. Despite these factors, he envisions the bank achieving profitable growth through the repayment of high-cost borrowings. He describes this as a gradual glide path rather than an immediate change.
As the bank raises funds, the surplus will be used to maintain reserves and repay bond or loan maturities as they arise. Any remaining funds will be deployed strategically to support the bank’s growth objectives.
Jagdishan explained that if there are constraints due to monetary policies or tight liquidity in the system, the rate of growth may be lower. However, he emphasized that by focusing on repaying high-cost borrowings, HDFC Bank can sustain a trajectory of profitable growth regardless of these constraints.
Jagdishan characterized the current phase of the bank as transitional, where certain metrics may not accurately reflect its performance. He emphasized that despite fluctuations in metrics like loan growth, the company’s focus remains on consistent bottom-line growth, which serves as a reliable anchor.
While some metrics may be affected by the transition, such as lower loan growth, maintaining a steady earnings trajectory remains the priority and won’t be compromised. This statement underscores the bank’s commitment to long-term financial stability and resilience during periods of change.
Jagdishan addressed the management of the bank’s loan-to-deposit ratio (LDR) following the merger with the housing finance company. The LDR compares a bank’s total loans to its total deposits for the same period and is crucial for evaluating a bank’s liquidity position.
Jagdishan emphasized the significance of the loan-to-deposit ratio (LDR) within the bank’s asset liability committee and management. He noted that historically, excluding the merger impact, HDFC Bank has maintained a healthy LDR range of around 85-90% or 80-90% depending on the year, reflecting a balanced approach between loans and deposits.
He highlighted that the growth rates of deposits and loans have been consistent, allowing for the maintenance of this LDR range. Jagdishan described managing the LDR as one of the most crucial deployment strategies for the bank and affirmed the commitment to maintaining a similar LDR range in the future.
Jagdishan acknowledged the impact of the merger on the bank’s metrics and business mix, noting that it was a matter even the regulators would recognize. He emphasized the need to accept what the bank has inherited from the merger. Looking ahead, he stated that the bank’s future actions would align with its past practices, aiming to maintain healthy incremental loan-to-deposit ratios (LDRs) similar to those achieved previously.
Jagdishan highlighted the bank’s commitment to maintaining a healthy liquidity coverage ratio (LCR), which measures its ability to meet short-term cash outflows during financial stress. He noted that the LCR serves as the reverse of the loan-to-deposit ratio (LDR) and that the bank’s strategic approach naturally leads to a robust LCR.
Historically, HDFC Bank has operated with an LCR ranging between 110% to 120%, which Jagdishan considers a very respectable and healthy level for a bank of its size. This level of LCR provides an adequate cushion to address any emergent liquidity needs effectively.
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