HDFC Bank sees period of consolidation as it absorbs mega merger: Sources

The lender’s quarterly earnings last week prompted a sharp 15% decline in the stock, even as its profit beat expectations, as analysts raised concerns about lending margins and sluggish deposit growth in its second quarterly report since merging with Housing Development Finance Co.

HDFC Bank, India's largest private sector lender, will take 4-5 years to fully digest its merger with its parent last July but expects to restore a key financial metric to pre-merger levels at the end of that period, two sources familiar with the bank's thinking said.

The lender's quarterly earnings last week prompted a sharp 15% decline in the stock, even as its profit beat expectations, as analysts raised concerns about lending margins and sluggish deposit growth in its second quarterly report since merging with Housing Development Finance Co.

"We will see a period of consolidation for 4-5 years during which growth rates and trajectory of some of the metrics will differ from what we were used to in the bank but this a different institution now after the merger," said one of the sources quoted above.

Before the merger, the bank's return on equity was above 17%, but it has since declined to 15.8% as of December-end.

"We are very focused on profitable growth and we will see the return on equity move back to the levels we saw before the merger over this 4-5 year period," this person said.

Other metrics, including the net interest margin, deposit and loan growth will be contingent on the economic environment and the strategic decisions the bank makes to adapt to the environment, the person said.

Following the earnings, investors and analysts criticised the bank for over-promising and under-delivering on certain metrics, particularly margins.