Will take a few quarters to move retail-wholesale mix back: HDFC Bank CFO

In a Q&A, Srinivasan Vaidyanathan says the lender expects to reduce employee turnover at the junior level with the introduction of RSUs

The country’s largest private sector lender HDFC Bank, which will be merging with mortgage lender HDFC, requested the regulator for the glide path to meet the cash reserve ratio and statutory liquidity ratio requirements. Srinivasan Vaidyanathan, chief financial officer of HDFC Bank, says the glide path will enable the bank to continue to support the economy by making funding available for lending as against kept in reserves in an interview to Manojit Saha. Edited excerpts:

Q1. What is the update on the HDFC Bank–HDFC merger? You've asked for more time to meet CRR/SLR and priority sector requirements. Has the regulator indicated whether or not it plans to give the bank more time on this?

A: We are going through the process of getting approvals from various regulators, including the Reserve Bank of India. The process might take 12-18 months to complete, which is a standard timeline for any merger. We have asked for a glide path for CRR/SLR and PSL, which the regulator is examining. The glide path will enable us to continue to support the economy by making funding available for lending as against kept in reserves.

Q2. HDFC has investments in unlisted companies, in sectors such as real estate. Post merger, will these assets get transferred to HDFC Bank or does HDFC need to exit these investments before the merger?

A: There are various subsidiaries and joint ventures. The larger meaningful subsidiaries (HDFC Life, HDFC AMC, and HDFC Ergo) are all in the financial sector and will get transferred to the bank. The sector that banks cannot participate in will be divested before the effective date.

Q3. The net interest margin for the fourth quarter compressed to 4 per cent mainly because the growth in higher rated, low yielding wholesale loans was higher than retail loans. The wholesale to retail asset mix is now 55:45 – exactly reverse of what it was pre-pandemic. Do you see the growth in the bank's wholesale book continuing to outpace retail loans?

 A: We do not target any particular mix and the growth is dependent on demand at the ground level. During the pandemic we were cautious in our lending given all the uncertainties relating to Covid and its impact on the economy/borrower. We migrated to better rated borrowers both in wholesale and retail. The mix has taken eight quarters to migrate from retail to wholesale and it will take a few quarters to move the mix back. The Q4FY22 gave specific one-off opportunities to grow wholesale due to external circumstances, which we have captured.

Q4. Where do you see the wholesale-retail asset mix 2-3 years down the line?

A: We expect GDP to be powered by government investments and consumption, including housing over the next few years. We've already opened the retail segment and the pandemic-related overlays on the credit that were put in place have been removed. As mentioned, we do not target any particular mix between retail-wholesale, but the retail mix should improve going forward.

Q5. With the interest rate cycle moving up, do you see a large number of customers moving their funds from savings accounts to fixed deposits, and if so, what kind of impact do you expect on the margins? The current and savings account share in total deposits was 46 per cent, down from 48 per cent. Do you see the CASA ratio coming down further as interest rates rise?        

A: We have seen depositors being more active in moving funds from savings to FD, when FD rates are high. There is an inverse correlation in the CASA ratio and system rates. When rates are low, we see CASA ratio rising. However, since CASA is fixed rate deposits, what we earn from the low cost is lower with system rates low. When rates go up, the CASA ratio falls, but the low CASA ratio earns you more as system rates are higher. We also run a matched book on both liquidity gap and interest rate sensitivity, which has kept NIM for the bank at a stable 4-4.4 per cent through multiple interest rate cycles.

Q6. The bank had earlier said that it decided to be 'risk-off' during the pandemic. Now that the pandemic is fading, do you think your appetite for risk will increase and get back to the pre-pandemic level?

A: We have already seen retail picking up from the September 2021 quarter and sequential growth improving in retail. In most products, our policies are back at pre-pandemic level. There are macro factors like inflation and increasing interest rate whose impact will have to be assessed on the customer segments.

Q7. The bank's cost-to-income ratio for the quarter was at 38 per cent. With the bank planning to open more branches, stepping up investments in technology and retail, where do you see cost to income ratio by the end of FY23? When most other banks are going digital, why is HDFC Bank opening new branches aggressively?

A: India is a large country, and we believe that branches, especially in the deeper geography, are very important for attracting new customers. Our model is to attract the new customers using the branch channel and move them to the digital channel for servicing. These are digitally enabled branches which allow all banks products to be delivered in the deepest part of the country. Most of these are small 2-5 member branches and are important as a large part of India lives in semi-urban/rural areas. Branches also act like base office for our sales and collection people. The bank intends and considers these as investments for future growth which sets the ground for continuing the growth trajectory. The cost of opening 750 branches is part of the current cost to income ratio and while we expect to run very efficient operations, branches and technology are important investments for the future growth of the bank.

Q8. Credit offtake is expected to be much better this financial year as compared to the previous one. What kind of loan growth is HDFC Bank aiming for in FY23? What is the projection for over deposit growth and CASA growth?

A: We have typically grown faster than the banking system. We do not have any particular growth rate that is targeted, and it will depend on ground level demand.

Q9. The bank has approved 10 crore restricted stock units (RSUs) at Re 1 each for mid-junior level employees? What is the thought process behind the move?

A: We have effectively used ESOPs as long-term incentive plans for the employees. With RSUs, we extend this to the mid-junior level employees as well. Like ESOPs, RSUs will be part of the total compensation package for the employees. RSU will require lower quantity numbers of share for the same targeted compensation package at employee level and it will help reduce shareholder dilution compared to ESOPs.  We expect to reduce employee turnover at junior level with the introduction of RSUs.