Is HDFC Bank’s lacklustre stock performance about to get better with a stronger mortgage portfolio?

The last two years have seen HDFC Bank underperform in the stock market. The country’s second largest bank’s stock has been range-bound around Rs 1,600 apiece. There is some hope now of a revival. Come July 1, the bank will have an extensive network of specialised branches, highly skilled employees, and a secured mortgage portfolio thanks to the merger of HDFC Ltd with itself, that will provide a solid foundation to embark on a new journey of growth and profitability. However, success ultimately hinges on effective execution. Let’s take a peek into HDFC Bank’s approach to extracting value from HDFC Limited’s network, people, and customers

Game-changing balance sheet play: Mergers and acquisitions generally bring incremental benefits in terms of products, branches, and new business segments. But HDFC Ltd’s merger with the bank has not only created a giant but also brought a high-quality secured mortgage portfolio. HDFC Bank now has a balance sheet size of close to Rs 32 lakh crore, second only to the State Bank of India’s Rs 55 lakh crore as of March 31, 2023. ICICI Bank has a balance sheet size of Rs 16 lakh crore. Globally, the combined entity will be part of the top 100 banks in terms of assets. But a large balance sheet with a focus on India will provide the bank an opportunity to take on larger exposure on the wholesale side. The bank’s corporate portfolio has key segments like NBFC funding, power, oil and gas, and telecom. In addition, the production-linked incentive (PLI) schemes in as many as 15 sectors, as well as supply chain financing, have opened new opportunities in corporate banking.

Gains additional scope to maximise returns in unsecured lending: The bank will now have a window open for doing more unsecured loans, especially personal loans and credit cards. The merger has resulted in the share of unsecured loans reducing from 30 per cent to 22 per cent of the total advances. Unsecured loans are high-yielding as compared to home and auto loans. In fact, the share of unsecured loans has been on the rise in both private and public-sector banks in the last 5 years. The bank is planning to offer pre-approved retail loan offers for HDFC Ltd customers. Given the salaried borrowers, the bank claims that these loans are safe with lowest delinquencies.

High-tenor retail assets in the loan portfolio: In the last three decades, the bank has sold home loans manufactured by the parent HDFC Ltd. As a bank, it only focused on short-term retail loans. Take for instance, auto loans, with a highest tenor of 4 years, followed by personal loans with 2 years, two-wheeler loans with a year, and credit cards with the shortest tenure of a month. With long-term mortgages coming into the portfolio with over 20-year tenures, the average tenure of the bank's overall loan assets has increased. This will bring more stability to the business operations, as the growing size of HDFC Bank requires more stability in the assets' portfolio with long-term revenue-generating assets.

Cross-selling opportunities for greater profitability: The bank now has access to the parent’s 45-plus years of expertise in mortgage origination and loan servicing processes. There is also a huge cross-selling opportunity, as prior to the merger, only a third of the bank’s 6,300-plus branches offered home loans. The banks will now offer home loans through a much larger network. In addition , only 2 per cent of its 70 million customers had taken a home loan from the parent company, HDFC Ltd. This offers a huge opportunity to tap existing customers for home loans. The bank's CEO, Sashi Jagdishan, is planning to run mortgages in an integrated fashion by bundling them with retail products such as cars and personal loans, wealth management, insurance, etc.

Specialised people with expertise in mortgages: People integration is often the biggest challenge in a merger because of duplication of work and different work cultures. This, however, is not a challenge. The parent firm has 3,900 specialised people compared to the bank’s 1.7 lakh employees. But these specialised people come with deep expertise in mortgages. These people could be a guiding force for training the bank's workforce to sell mortgages. Similarly, the banking platform opens up a bigger canvas for them to sell other retail products.

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