Sashidhar Jagdishan, managing director and chief executive officer of HDFC Bank, tells Manojit Saha what the deal with HDFC means to the bank and the opportunities it provides
Sashidhar Jagdishan, MD & CEO, HDFC Bank
Sashidhar Jagdishan, managing director and chief executive officer of HDFC Bank, tells Manojit Saha what the deal with HDFC means to the bank and the opportunities it provides. Edited excerpts:
What are the benefits HDFC Bank will get from the deal?
In our 69-million customer base, the proportion of mortgages is so low … there are five million customers who have taken housing loans from other banks. That itself is Rs 15 trillion. Just imagine, if I start penetrating that, I can create another HDFC Bank. Today our loan book is Rs 15 trillion. So I focus on that. Over the next three-five years, I am assured this will only boost my growth.
What is the value of the deal?
The value of HDFC is $60 billion. If you strip off the proportion of its holding in us, it comes to $40 billion. So the value of the deal is $40 billion.
How will the deal benefit home loan customers?
They (HFDC) were an NBFC, with finite funding capabilities. Therefore, they are limited to offering home loans only where they are present. We are ramping up our distribution. We have 6,500 branches. They have 650-plus offices, 50 per cent of which are large ones. I need speed, and speed is execution. You need a loan now, because, otherwise, you may not get the house. Given these limitations, while we have grown 24-25 per cent in the past few years, we can unleash it even more.
What happens to the HDFC Credila, the education loan subsidiary of HDFC? Will that also be merged with HDFC Bank?
We have not examined that in detail. But we have sought, as part of our approvals [to the Reserve Bank of India], allowing all the subsidiaries — the insurance companies and the education loan subsidiary — to function as they are. But if they were to say, we would get a signal from the regulator and we will ensure compliance with the requirement.
The Reserve Bank of India generally does not allow a bank-sponsored NBFC to perform an activity that a bank can do.
You are absolutely right. That is the theme of the discussion. So there are two options. Either they monetise that or on the effective date (of the merger) they try to integrate with the bank. The leadership team at HDFC will take a call, depending on the kind of direction the regulator gives them.
Will the merger squeeze the net interest margin of the bank?
You have to see the margin in conjunction with the operating cost and the credit cost. The margin for the book, where you have a certain proportion of wholesale assets and retail assets, has always been 4-4.4 per cent because in the DuPont analysis the operating cost and the credit cost were in a certain range, which could give us a return on assets of 1.8-2 per cent. Now when you look at it, obviously, the margin and the spread on the mortgage book are going to be lower, so the simple arithmetic of that will depress the margin. But because it is a larger ticket than any of the consumer products that the bank has, and the duration is longer, the operating cost on that particular ticket will be lower. Plus, if you look at the track record of the credit cost of the housing portfolio, it is much smaller than any of the unsecured loans that we have. So when we look at the margins, even though they will be depressed, net of the credit cost, they will still be much better on an apple-to-apple basis. So, what you need to look at is the risk-adjusted return on assets and that will be, if at all, stable or it could expand.
Since you have American Depositary Receipts, do you need approval from the US authorities?
No. The battery of legal experts has examined this subject. I don’t think there is any requirement of any regulatory approvals from the Securities and Exchange Commission. If you go back in time, the bank which files its 20F on an annual basis has already put this in the risk factors that if there is a potential merger, these are the risks. So from an investor perspective and regulatory perspective in the United States, I think the disclosures are adequate.