HDFC Bank Emerging From The Crisis | The Editors' Cut | NDTV Profit
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00:00 Let's take it to the editor's cut now because there's a very important piece around what is
00:05 arguably the most talked about stock the last few days, weeks, I could argue Alex, for the last few
00:11 months. Certainly, the first narrative Neeraj was when is HDFC Bank going to play catch up and that
00:18 kind of fell through the floor one would say right. All right, so but let's talk about it. HDFC Bank
00:24 since mid-January down about 13 odd percent despite the gain in trade yesterday. It was a bit of a
00:29 relief for those people that are betting on the bank for the long term and we're going to talk
00:33 about whether or not certain aspects that have come through source-based conversations that
00:38 Vishwanath Nair has had, whether that's going to alleviate some of that selling pressure and in
00:43 fact whether or not the stock can gain at all from this point. We'll also talk about what the
00:49 management's role in all of this has been and Sajith will bring some perspective into that. But Vishy,
00:54 let's talk about the source-based information that you've picked up first. Right Alex, so what we
00:58 understand through speaking to some sources who are very close to this entire decision-making
01:03 process, the idea is that the bank is going to look at selling some of the assets which are linked to
01:09 high-cost borrowings. Now, you have to remember that for HDFC Bank the high-cost borrowings were
01:13 the biggest pain point during the third quarter. From 8% of crypto liabilities because of the
01:19 merger that portion of the borrowings have risen to about 21%. This was primarily because HDFC
01:25 Limited had a lot of borrowings on its balance sheet which transferred to HDFC Bank. Now, what
01:31 the management intends to do is sell some of these high-cost assets and then once you sell those
01:37 assets then obviously you can start releasing those high-cost borrowings and that brings down
01:42 the cost. It also brings down the loan deposit ratio which is another pain point for HDFC Bank.
01:47 110% on the loan deposit ratio, so once you start reducing the loan portion of that equation,
01:54 the ratio starts making a little more sense. So, currently the difference between the advances and
01:59 deposits is about 2.5 lakh crore. During the merger, the bank got a lot of builder loans from
02:06 HDFC Limited. One would estimate that about 80-85% of HDFC Limited's loan book was individual home
02:14 loans. The remaining 15-20% is coming from the developer loans which is the problem area. So,
02:22 once you start selling down those loans then you can ease out that borrowing portion.
02:27 The bank also intends to keep churning out PSL compliant loans, priority sector lending,
02:32 because a bank is required to have 40% of its total credit in priority sector. So,
02:38 that they will continue to generate as well as hold. For the other loans, they will generate
02:43 and they will look to sell down because it makes more sense to give it to the market and retain
02:48 maybe only the management fee portion of that deal rather than keeping the asset on your book and of
02:55 course failing on the LDR portion. What is the implication, if at all, of selling these loans
02:59 in the securitization market on the profitability of the bank? It doesn't really change much because
03:07 what you lose out on the margin front of the deal, you make on the management fee. So,
03:14 that sort of covers, it balances things out. And just a follow up before I go to Sajith on
03:19 his view on the management, there is a considerable gap as you pointed out,
03:24 two and a half lakh crore and earlier we were talking about how deposit growth has not come
03:27 through. 40,000 odd crore was the increase in the third quarter. During the third quarter, yes.
03:32 Which is kind of lower than what they have achieved in the past, fair enough. But even
03:36 with the sell down and release of some of those deposits, high cost deposits, will they be able
03:41 to bridge that gap? So, what the bank intends to focus on is growing the deposit base. Now,
03:46 that is part of the core decision making process. Now, what has happened during the October,
03:51 December quarter, unfortunately, the bank went through a leadership reshuffle of sort, right?
03:56 Under Sajith Jagdishan, there were multiple business leaders and as part of his management
04:02 philosophy, he has reshuffled that portfolio. So, new people came in who took some time to
04:07 just adjust the business. Now, that is the reasoning that is coming through from my sources.
04:12 But what is also part of the discussion is also that the pie for deposits has come down. The
04:17 incremental deposit growth in the system is slower and HDFC Bank continues to hold about 18 to 20
04:23 odd percent of that incremental deposit share, which is healthy. But since the outstanding
04:28 number has come down, that 80-20 percent is also coming down. So, one 1.5 lakh crore which they
04:33 reported in the previous quarters may not happen right away. But this 40,000 crore is probably an
04:38 outlier and it is likely to steadily go up. Okay. So, combination of those two factors.
04:43 Sajith, I kind of know what you are going to talk about and it is not a pretty picture, right?
04:49 Because one has to look at the role of the management in managing expectations and also
04:54 including the investor base in what their vision going forward is. There are certain issues that
05:02 they knew would crop up. I do not think that a gap in deposits and lending is something that a
05:08 bank does not get aware of in the process of merging. What is the point that you are making?
05:13 You know, when there is a promoter-owned company and you have a professional management,
05:19 the management is reporting to the promoter and he is responsible for whatever it is and
05:26 the promoter is taking the fall for it. In a bank which does not have an unidentified promoter,
05:32 it is the management or the MD and CEO whose responsibility is to answer to the shareholders,
05:37 simple directly. You have a mechanism in the market where you give at the end of the quarter
05:44 an advance notification to the market and to the shareholders about how the quarter went by,
05:50 what are the ifs and buts in the quarter, if there is any surprises you bring in that
05:56 communication. The communication was not there. Now, if some of the sources are saying that,
06:02 oh some of the sell side analysts may have put a sell, there were institutions like hedge funds
06:07 who sell, the thing is the share price was punished because of our information asymmetry
06:13 which is there. Now, our markets thrive on information asymmetry and they made gains on that.
06:20 And the institutions that sold were not obliged to hold.
06:23 They are there to make profit, not to support the management. Their KRAs are to make profit on
06:34 the investments. So, whether it is a hedge fund or it is any other fund which is shorting or doing
06:41 an arbitrage on that information asymmetry and getting a gain of 13-14%, it is their right to
06:47 do it and there is nothing wrong in it, in this market to do it. Market punishes and rewards
06:52 based on information asymmetry. Management which is very good in communicating, there is a reward
06:57 that comes in because being in form of a premium coming into the stock. If you are poor in
07:02 communicating, you will be punished in that. We have seen in some of the IT companies where the
07:08 management have been upfront in doing it. Despite negative news, despite anything, we have seen
07:14 stocks going up, there is a valuation, there of course the P/E ratios may have fallen a little
07:20 bit because of that, but there is not this kind of surprise that is coming in. Market does not
07:26 like surprises and if you create an information asymmetry or a gap between what you want,
07:32 what you promise and what you deliver, then there is a problem for that bank or the company.
07:36 It is a harsh lesson I would think.
07:38 Can I just add one point on this? So, we have to remember that for a lot of the private banking
07:43 ecosystem, the last five years you have seen big management changes. Now, typically associated
07:47 with management changes is something known as kitchen sinking. When the new management comes in,
07:51 you see a big dip in the asset quality, you see a big dip in profitability and then things start
07:56 to take over. In the last round of management changes, that has not really happened. So,
08:02 there is a little bit of like what exactly is happening with this management chain and what
08:05 is the surprise element and if information asymmetry as Ajit puts it is the problem,
08:10 then people just latch on to that and that becomes the…
08:12 You know, just look at it, right. It took them seven days to come out with
08:16 some kind of information and that too on a source base thing to all platforms there.
08:23 Seven days when you have seen 32,000 crores of delivery turnover happening on that stock.
08:29 And there is a churn still going on because you have 50% or more than 50% of your investors who
08:37 are foreign investors and they have not been, they are not happy in any way.
08:41 And you can call it therefore a failure in communication.
08:44 It is a failure. Means if you were in the US, you would have been questioned by the board
08:48 or the shareholders saying that you know what are you doing.
08:50 So, okay, so we have established certain aspects. The question is whether this incremental
08:56 information is going to be enough to stem the tide that we have seen so far. Yesterday,
09:01 you saw a bit of a breather in the price of HDFC Bank. We will see soon enough
09:05 what the reaction to the latest update is.