HDFC Bank Explores Asset Sale Strategy to Trim Costs
In a strategic move to streamline its balance sheet, HDFC Bank Ltd., one of India’s leading private lenders, is considering the sale of certain assets from its loan book, according to sources familiar with the matter. The move aims to alleviate the burden of high-cost borrowings and enhance the overall efficiency of the bank’s financial structure.
The bank is committed to optimizing its cost ratio on the balance sheet while concurrently reducing the credit-deposit ratio, as stated by an anonymous source close to the matter. Loans earmarked for potential sale will primarily include those that do not qualify for the priority sector lending tag. HDFC Bank plans to maintain its focus on originating high-quality loans but reserves the right to sell them through the securitisation market.
Multiple financial institutions are reportedly expressing interest in acquiring these high-quality loans from HDFC Bank. The potential asset sales are expected to contribute to a more favorable credit-deposit ratio for the bank. As of December 31, 2023, HDFC Bank’s credit-deposit ratio stood at 110%.
The rise in high-cost borrowings for HDFC Bank is attributed to its merger with Housing Development Finance Corp (HDFC). Post-merger, the ratio of high-cost borrowings increased to 21% of total liabilities, compared to 8% before the merger, as revealed in the October-December quarter results. The absolute value of borrowings reached Rs 7.38 lakh crore as of December 31, up from Rs 2.09 lakh crore on June 30. The merger became effective on July 1.
This surge in high-cost borrowings has resulted in an escalation of the bank’s cost of funds. As of December 31, the cost of funds for HDFC Bank reached 4.9%, compared to 4% on June 30.
Taking proactive measures, HDFC Bank has already been working on reducing high-cost deposits, a strategy disclosed during the announcement of the third-quarter results. In the same quarter, non-retail deposits decreased by Rs 11,800 crore, while retail deposits surged by Rs 53,000 crore. This nuanced approach resulted in a net increase of Rs 41,100 crore on the deposit front.
The recent dip in deposit growth is attributed to incremental system deposit growth lagging, coupled with a shifting trend as alternative financial products like mutual funds gain traction. Despite the challenges, HDFC Bank maintains an impressive 18-20% share of incremental deposits.
Despite a sharp sell-off in domestic markets following the announcement of third-quarter results, HDFC Bank remains focused on its goal of doubling its business every four years. The bank’s stock, which witnessed a 15% decline, closed at Rs 1,455.85 per share on Wednesday, marking a 1.98% increase from the previous close.