HDFC Bank Merger Triggers Alarming Funding Risk Warning

HDFC Bank‘s CEO, Sashidhar Jagdishan, has expressed apprehensions about funding risks following the seamless $40 billion merger with its parent company. In the bank’s inaugural annual general meeting post-merger, held after the merger’s implementation on July 1, Jagdishan addressed shareholders about the potential challenges in funding arising from the merger. He underlined, ‘The merger’s risks are mainly centered around the funding aspect.’

Jagdishan’s concerns stem from HDFC’s partial success in securing sought-after forbearance from the Reserve Bank of India (RBI) concerning liabilities. However, the RBI’s decision to withhold exemptions on Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements on deposits from HDFC has created a significant hurdle for the bank. Additionally, the RBI’s imposition of an extra 10 percent CRR on deposit inflows in all scheduled commercial banks since May has raised further questions.

Despite these challenges, Jagdishan expressed optimism in overcoming funding obstacles. He assured shareholders that the board, senior leadership, and staff are well aware of the task at hand. Jagdishan justified the merger’s timing and benefits and stressed the team’s enthusiasm in confronting the funding challenge. He said, ‘We’re extremely confident in our growth trajectory over the past decade. There’s no reason why we can’t surmount challenges and capitalize on growth opportunities in the coming years.’

Regarding finances, HDFC sought shareholders’ nod to raise ₹50,000 crore from bond issuances in the future. Jagdishan affirmed the bank’s proactive stance in managing liabilities through such measures.

The merger has potential implications for HDFC Bank’s Net Interest Margins (NIMs), given the increased presence of lower-interest-yielding housing loans. Jagdishan noted that this impact would become evident in the September quarter results. He also emphasized the positive aspect of housing loans, which offer improved repayment ratios and subsequently lower credit costs.

Jagdishan remains optimistic about restoring profitability and returns to historical levels within 18 months, considering the bank’s consistent NIMs ranging from 4 to 4.4 percent. He emphasized that the bank’s philosophy prioritizes growth without compromising profitability.”