Markets
HDFC delivers on promised cross-selling
Summary
- Income from distribution of third-party products surged 33% in Q2, while income from payments and card business also went up 20%, riding on digital transactions.
HDFC Bank Ltd’s September quarter (Q2FY25) results, the first comparable period after merger with HDFC Ltd, show that India’s largest private sector bank by balance sheet size and market capitalization has regained growth momentum. A striking factor is the core fee-based income growth of 16% year-on-year, largely led by distribution of third-party products and payments. Consequently, core pre-provisioning operating profit (PPoP) rose 13% to ₹24,413 crore.
After repeatedly emphasizing on cross-selling opportunities to HDFC Ltd’s customers in the past, the management has finally delivered on its promise as can be seen from 33% jump in income from distribution of third-party products. Income from payments and card business also went up 20% as digital payments enable earning of various charges including interchange fee from merchants. It could also be an indicator that the bank’s credit card business is now gaining traction in terms of fees. Note that the bank’s share in outstanding credit card had been falling from 24.2% in FY21 to 20.2% in FY24 as a result of RBI ban. The market share has now slowly inched up to 20.4% in FY25 year-to-date after a long time.
Net interest income (NII) grew 10% to ₹30,114 crore as net interest margin (NIM) marginally expanded by six basis points. There is scope to improve the margin further by prepaying high-cost borrowings of HDFC Ltd, but the management highlighted during the post result earnings call that these are non-callable. Hence, they can only be prepaid after mutual understanding with the lenders.
Also read | HDFC Life continues to struggle with margin pain
While average advances under management (including securitized book) rose 10% to ₹20.4 trillion, the average deposit growth was at 16% to ₹23.5 trillion. The relatively slower loan growth in advances versus deposits helped the credit-deposit (C-D) ratio to drop to 101% from 105% sequentially based on gross advances and deposits at the end of Q2FY25.
While a high C-D ratio is good for the bank’s profitability, an extremely high C-D ratio poses liquidity risk especially in circumstances of panic deposit withdrawals as liquidating advances or investments may not be always quick without any haircut. Generally, a C-D ratio between 80-90% is desirable. The bank’s management stated during the earnings call that their endeavour is to lower the C-D ratio in the high 80s over the next two-three years, which was the level it was operating before the merger with HDFC.
Asset quality continues to be robust with GNPA were at 1.36% of gross advances and NNPAs at 0.41% of net advances for Q2FY25 as against 1.33% and 0.39%, respectively, quarter-on-quarter (q-o-q). Consequently, credit cost remained stable sequentially at 0.42%.
HDFC Bank has finalized the public issue of HDB Financial, its NBFC subsidiary with 95% stake. The subsidiary is likely to end FY25 with net worth of ₹16,000 crore, which could peg its valuation at ₹80,000 crore based on price-to-book value of 5x in line with other big NBFCs. However, this would be tiny market capitalization as the bank’s standalone market capitalization is almost ₹12 trillion.
On the flip side, the yield on assets fell 10 basis points sequentially to 8.3% in Q2FY25, which highlights the pressure on loan pricing due to the aggressive competition in lending. If valuation of subsidiaries at ₹250 per share is excluded from the share price, the standalone bank is being valued at price-adjusted book value of 2x based on FY26, according to Motilal Oswal Financial Services.
And read | Is HDFC Life a new competitor to the mutual fund industry?
