HDFC Bank's Margins Set To Improve As Merger Impact Wanes, Says Bernstein

HDFC Bank Ltd.'s margins are set to improve as the negative impact of its merger with Housing Development Finance Corp. on earnings has passed, according to Bernstein Research.

The private lender's decision to double the number of branches is the right move as it will be the key driver for deposit growth, Pranav Gundlapalle, senior research analyst at Bernstein Research, told NDTV Profit.

The lending side is the most affected by the merger as yields have not risen in pace with the previous years or with that of peers, he said. "The big question is what is stopping them from accelerating on the higher-hitting segments, the likes of personal loans and credit cards, where they seem to have gone extremely slow versus the market versus their peers, and that is really hurting their NIMs."

However, if the bank feels that the risk-adjusted rewards in other segments are better despite the "optically lower yields", then that "will be interesting to know", Gundlapalle said.

Investors priced in the uncertainty from the merger a lot earlier than expected, he said. HDFC Bank was a premium and a top brand in the segment, but there are a lot more options today, according to Gundlapalle.

One of the important questions that Bernstein has for the bank is regarding their choice of metric that they want to solve.

The bank can't focus on all the metrics at the same time and needs to clarify whether the management will opt to focus on bringing down the loan-to-deposit ratio or maintaining the liquidity coverage ratio, whether it is a regulatory requirement or something else, Gundlapalle said. This will help investors understand progress, he said.