No word from RBI yet on regulatory leeway for HDFC twins' merger

HDFC Bank let go of Rs 40,000 cr loans as pricing didn't match bond mkt rates

HDFC Bank has not yet heard from the Reserve Bank of India (RBI) on its request for certain regulatory relaxations ahead of the merger with HDFC, private lender’s Chief Financial Officer Srinivasan Vaidyanathan has said.
 

“Not yet. We have not heard yet. But, we would expect it within the next month. There is no particular time frame, it is not (according to) a particular schedule. For context; the merger process is progressing,” Vaidyanathan said at a post-earnings conference call on Saturday.
 

“The National Company Law Tribunal (NCLT) final hearing is on January 27 and so thereupon once it’s adjudicated, there are certain other processes, regulatory processes to go through. So, we do have some time that this will take and we are hoping that in this interim period there will be something,” he said.
 

HDFC Bank had requested the RBI for permission to adopt a phased approach to comply with regulatory requirements, such as cash reserve ratio and statutory liquidity ratio, as well as norms on priority sector lending due to the process of the merger with HDFC.

On April 4, HDFC Bank said it would take over HDFC, the country’s largest mortgage lender, in a deal valued at $40 billion. The merger was initially to be completed by the second or third quarter of the next financial year. In November, HDFC’s Chairman Deepak Parekh had said the merger could be completed by April 2023.
 

According to Vaidyanathan, HDFC Bank witnessed firm demand for credit in October-December, but had let go of wholesale loans worth Rs 30,000-40,000 crore during the quarter as pricing did not match up to the prevailing market rates.
 

The demand for loans was mainly driven by NBFC, PSU and the retail and infra segment, Vaidyanathan said.
 

“Over Rs 30,000-40,000 crore of loans, we did not go through (with). Because the price has to catch up with what we are seeing in the bond market. It didn’t catch up, so we let go. If you think about the bond spreads in the quarter, the bond spreads widened in the quarter. Whereas the loan has to come and catch up over time,” he said.
 

“So, we took a stance saying from a pricing point of view we will wait for the price to come up…the bond spreads went up anywhere from 30 to 60 basis points. We do have to wait and see how the loan starts to catch up on the yield from an opportunity point of view where the other banks in the country or the financial market participants would appropriately start to price in looking at how the bond spreads are moving,” he said.
 

With several large banks tapping the corporate bond market in December — including HDFC Bank — the greater supply of paper drove up corporate bond yields sharply, with those on benchmark papers jumping around 12-14 bps last month.
 

Banks have opted for large-scale fundraising through bond issuances in order to fund strong loan growth even as deposit growth lags. The pressure to raise deposit rates and therefore raise funds has led to questions regarding banks’ interest margins.
 

Whether the margin is under pressure, Vaidyanathan said: “Yes, we are cognizant that we need to keep up on the yield to keep pace with the deposit cost that goes up.”
 

“To the extent deposit (rates) goes up, the asset yield goes up. You keep the margin constant or thereabouts within a small range. But the margin going into the middle-to-higher end of the 4 per cent to 4.4 per cent or 4.5 per cent is a function of the mix of wholesale and retail,” he said.
 

He said HDFC Bank would keep its interest margins within the historical range of 3.94-4.5 per cent even if policy rates were to fluctuate on either side by the end of the year. In October-December, the bank’s core net interest margin was 4.1 per cent on total assets and 4.3 per cent on interest-earning assets.
 

“The function of the NIM (net interest margin) going up or down is about the mix of products. More retail composition in the portfolio gets you higher NIM and comes with a higher cost and also comes with higher credit cost. That credit cost can come with a slight lag,” he said. At present, retail loans comprise 45 per cent of the loan book while wholesale loans are at 55 per cent, he said.