Outlining justification for merger of HDFC with the HDFC Bank in his letter to shareholders in the annual report 2021-22, Jagdishan said: “The proposed merger adds an entirely different dimension to the future. We believe that the runway is huge, and we can potentially add an HDFC Bank every five years.”
He further said that the bank proposes to nearly double its network of branches in the next three to five years by opening 1,500 to 2,000 branches every year. Currently it has over 6,000 branches across India.
“The density of branches for the population of this country is way below that of OECD countries. This is where our branch banking strategy comes in. Today we have 6,000-plus branches across India, and we plan to nearly double our network in the next three to five years by opening 1,500 to 2,000 branches every year,” he said.
In early April this year, the Housing Development Finance Corporation and its subsidiary HDFC Bank had announced a transformational merger, which is expected to be completed in about 15 to 18 months.
Christening the merger as the ‘Power of One’, Jagdishan said the bank looks forward to the phenomenal set of talent, deep product knowledge and expertise, the processes, and system that the lender will add to the existing ones.
HDFC Bank cannot afford to miss this opportunity, Jagdishan said, adding that home loans are emotional products and bring with them a host of accelerated benefits for the bank.
“Today the environment for buying a home has changed. RERA has ensured greater transparency in the process. Price corrections in the property market have seen inventories come down. Also, rising incomes mean that home loan EMIs have come down as a percentage of a person’s income,” the official said.
He said with the penetration of telecom, internet and television services, the desire to own better homes has increased across the country.
“All this means that housing is going to be a huge growth opportunity and one of the key drivers of India’s GDP over the next decade.”
Putting forth the statistics, Jagdishan said that only 2% of its customers source their home loans from it, while 5% do it from other institutions. “The latter is equivalent to the size of our retail book. Home loan customers typically keep deposits that are 5 to 7 times that of other retail customers. And about 70% of HDFC Ltd’s customers do not bank with us.”
All these give HDFC Bank the idea about the size of the opportunity, he said, adding that the long tenor nature of home loans provides resilience to the balance sheet. The bank is one of the largest consumer durable financiers in the country.
“We can easily bundle this with a home loan, as with every home loan, there is a propensity of a customer to take new consumer durables. It is this kind of bundling that will increase margins. With the advantage of a lower cost of funds and the phenomenal distribution muscle that we have built, it is imperative that we seize this opportunity,” he said.
Reasoning the timing of merger, he said there are other favourable factors too such as narrowing down of the regulatory arbitrage between banks and NBFCs over the last few years, with the reserve requirements coming down to about 22% from 26%.
“Both institutions are well-capitalised and have surplus liquidity and a strong portfolio of investments in government securities. The increase in priority sector lending that we need to do, due to the merger, is possible now with our own increased focus on MSMEs, the affordable housing loans that we can do and the well-developed PSL certificate market.
“All this means that on the day of the merger there may not be any need to raise further funds to meet reserve requirements. The addition of the home mortgages portfolio on our balance sheet makes it more diversified and robust.”
Futher, the enhanced capital position of the bank post the merger also means that the lender can take bigger exposures in leading corporates and power the country’s infrastructure build out, Jagdishan said.
He said HDFC Bank already had a huge opportunity with the under-penetration of banking services in the country. “The proposed merger adds an entirely different dimension to the future.”
On the capital raise plans, the lender said it proposes to raise an amount not exceeding Rs 50,000 crore by issuing long-term bonds on a private placement basis.
It will seek shareholders’ approval in the ensuing annual general meeting scheduled for July 16, 2022 for the fundraise plan.
In fiscal year ended March 2022, HDFC Bank reported nearly 19 per cent growth in its net profit at Rs 36,961 crore. Its balance sheet grew by 18.4% to Rs 20,68,535 crore.
On the asset quality front, bank’s gross non-performing assets stood at 1.17 per cent of the gross advances as of March 31, 2022.