HDFC-HDFC Bank merger to be completed in next 5 weeks: Top highlights from Analyst Meet

HDFC Bank Analyst Day Meet Highlights: HDFC Bank recently held its Analyst Meet wherein the private sector lender highlighted how the different segments of the bank have performed with respect to growth, asset quality and return ratios in the last three years and how the bank was getting future-ready by focusing on strengthening its digital capabilities and sustainable growth. Despite the aggressive investment plans and merger, the management, as per the brokerages who attended the meet, has exuded confidence that it will maintain the return on average assets (RoAAs) in the range of 1.9-2.1 per cent from the first day of the merger.

Here're the key takeaways from the lender's Analyst Meet - 

• Huge growth opportunity following the merger: HDFC Bank suggested that the merger process is on track and is expected to be completed in about five weeks. Management believes that the merger shall be a game changer for the HDFC brand as a whole. Having looked at each other as associates for the last 28 years, the bank post-merger will operate as a single strong force. The bank aims at leveraging the individual strength of each organisation and will offer more benefits to the HDFC brand in the form of quick sanctions, enhanced corporate relationships, and an increased distribution network for assets and liabilities. 
• Shift to customer-centric business model: HDFCB's focus has shifted from a product-centric approach to a customer-centric service-oriented approach (which is expected to meet the needs of the customers). Management highlighted that around 2010, the bank had decided not to push products to customers that the latter do not want. Today, the bank is leveraging its investments made in AI and analytics and started offering need-based products (expecting the penetration levels to increase in future). The bank believes that a strong distribution network coupled with higher customer engagement has helped the bank build stronger depositor relationships.
• Corporate segment growing at a healthy pace: HDFC Bank has reported 15 per cent YoY growth in the corporate segment even as it let go of Rs 1 trillion of growth opportunity in the corporate banking space. Key reasons for foregoing such growth were: 1) rates not favourable, 2) additional covenants, and 3) no cross-sell opportunity, Motilal Oswal notes. 
• Retail Assets: Under the retail asset vertical, the bank has been continuously focusing on launching new digital product journeys to enhance customer engagement. The bank is witnessing strong growth opportunities across housing loans, unsecured loans and gold loans (small portfolios) under the retail lending space. Ever since FY15, the bank has been able to add a new digital journey every year starting with a 10-second personal loan for existing customers in FY15. The bank ensures that the new products which are launched are based on past experiences (as the MOAT), and tested well before launch. 
• Subsidiaries to witness higher business traction: After the merger, the focus on subsidiaries is going to increase with better alignment of business interests. HDFC Life, in particular, will start getting more preference in terms of business volumes, and its counter share will increase.
• No change in branch expansion strategy: HDFCB intends to add nearly 1500 branches over the medium term, of which 50% would be added in semi-urban and rural (SURU) areas. Currently, a branch covers a radius of 7-8 km while over 5 years, HDFCB would like to penetrate deeper and reduce this to 4-5km. Branches located in the interiors would be smaller and size up to only ~500sq.ft. Hence, the break-even of these branches would be lower than the bank average of 18-24 months. 
• Deposits: Current Account and Savings Account (CASA) ratio to be in the range of 40s. Bank believes spending patterns should normalise which will help sustain the CASA level. As regards term deposits (TD), the bank feels it is underpenetrated will only a 14 per cent market share. Customer engagement will remain key in gathering TD. The current market share is about 10 per cent and the bank would grow by gaining a market share.
• Cost to Income: There is a spike in the C/I ratio as of now due to backend digitisation related to the merger. The bank aims to bring the C/I ratio down to 30 per cent in the next 10 years. Digitising processes at the back end, as well as the front end, will help achieve the target, Prabhudas Lilladher mentions in its report. 
• IT and Digital Initiatives: HDFCB is on the path to building a future-ready digital bank for India. The bank is leveraging its cloud technologies to enhance operational efficiencies and deliver uninterrupted services to customers, focusing on improving the backend process and showing the improved processes, IDBI Capital notes. 
• MSME: The bank has been growing very strong but the issues remain with the sector in terms of asset quality. Whereas for HDFCB, the asset quality is very good as the bank is focused on the top end. The bank’s unique selling propositions (USPs) are better risk management and monitoring, notes Haitong International. 

Brokerages' views

Brokerages remain bullish on the bank's prospects and have maintained a "BUY" rating on the stock post the event. Prabhudas Lilladher says," We keep multiple unchanged at 3.0x on core FY25E adjusted book value (ABV) and retain BUY with TP of Rs1,925." Motilal Oswal estimates HDFC Bank to deliver a nearly 19 per cent PAT CAGR over FY23-25, with RoA of nearly 2 per cent. "HDFCB remains one of our preferred picks and we maintain our Buy rating with a TP of Rs 1,950," it said. Haitong International has assigned an "OUTPERFORM" rating with a target price of Rs 1,978. IDBI Capital, too, has a "BUY" call on the stock with a target price of Rs 2,070.

On Thursday (May 25), HDFC Bank shares ended flat at Rs 1,613.35 apiece.