HDFC Bank has reported a sharp fall in its lending margin and a rise in bad loans on a sequential basis for the fiscal second quarter ended 30 September 2023. 

This is the first time India’s largest private sector lender has announced results after merging with parent HDFC Ltd on 1 July in a $40 billion deal.

The bank’s net interest margin (NIM), which stood above 4% for many years, fell to 3.4% on all assets in the quarter ended 30 September 2023 and 3.6% on interest-earning ones. NIM was at 4.1% in the June quarter.

A shrinking of the NIM was expected due to higher cost of funds of HDFC Ltd.

“When you have a debt-funded balance sheet that is merged… they have borrowings in the mix of funding, the cost of borrowing is higher than the cost of deposits. We expect the deposits will replace borrowing over a period. Our credit-to-deposit rate is 107%, as compared to 85% before the merger,” said HDFC Bank chief financial officer Srinivasan Vaidyanathan in a conference call with media.

“The cost of the fund differential is almost 250 bps,” he further said. HDFC Ltd had about Rs 5 trillion worth of borrowings when it was merged with the bank.

For the quarter ended September 2023, HDFC Bank’s net profit stood at Rs 15,976 crore, up 50.6% year-on-year. The numbers, however, are not comparable as the merger of the bank and mortgage financier HDFC Ltd took place only on 1 July this year. In the previous fiscal, HDFC Bank and parent HDFC operated as separate firms.

Net interest income, or core lending income, grew 30.3% year-on-year to Rs 27,385 crore.

Other income stood at Rs 10,708 crore compared to Rs 7,506 crore a year ago as it made a mark-to-market gain of Rs 1,041 crore during Q2 versus a loss of Rs 387 crore in the year-ago period.  

Post-merger, the bank’s asset quality deteriorated with gross non-performing assets (NPA) ratio rising to 1.34%, from 1.17% in the quarter preceding the merger, due to loans restructured from the HDFC Ltd loan book. These restructured loans were categorised as non-performing as per current regulations, Vaidyanathan said.

The gross NPA ratio was lower than the 1.41% for the combined entity on a pro forma basis at the end of the June quarter, the bank said. 

Gross loans stood at Rs 23.55 trillion, up 4.9% from the previous quarter on a like-to-like basis, the lender said. After the merger, retail loans form 55% of the loan book.

Deposits stood at Rs 21.73 trillion at the end of September, a 5.3% increase from the previous quarter on a comparable basis.

The low-cost CASA (current account savings account) deposits ratio fell to 37.6% from 42% before the merger.