Months after shelving plans to list its non-banking subsidiary, HDB Financial Services,
HDFC Bank has initiated a formal process to rope in a strategic investor, said people aware of the matter.
The country’s largest private lender has appointed Morgan Stanley to handle this and feelers have gone out to global banks and domestic financial institutions already. The lender is expecting a valuation of Rs 60,000-67,500 crore ($8-9 billion) although the final contours will emerge only once firm offers are placed on the table, said one of the executives cited above.
Though the initial discussions are believed to be for a 20-25% stake, some potential suitors are keen on a path to control or joint control.
The discussions are preliminary in nature, but with the management confident of asset quality improving in a post-pandemic economy, this is the right time to kickstart a monetisation exercise, said experts. Some HDFC Group watchers also see this as a precursor to an eventual listing.
Loan Book, Footprint
“While it’s still unsure what will be the quantum of stake that HDFC Bank will part with, as the parent of HDB Finance, it wants to ensure it discovers the correct value for its NBFC (nonbanking finance company) in line with other non-bank lending peers,” said a person in the know.
As a policy, the bank doesn’t comment on market speculation, said the HDFC Bank spokesperson. HDB Financial Services didn’t respond to queries.
In June 2019, then HDFC Bank managing director and CEO Aditya Puri had hinted at a possible listing. That saw the stock almost double in the grey market to around Rs 1,150 apiece for an estimated Rs 80,000 crore valuation. It has come off those highs amid growing concerns over asset quality, exacerbated during the pandemic, and is currently hovering at Rs 875 per share for a Rs 70,000 crore valuation, down from Rs 970 levels in March. Secondary market experts feel that in anticipation of a stake sale, the buying activity on the stock has risen significantly.
In a recent analyst call after the June quarter results, HDFC Bank CFO Srinivasan Vaidyanathan had said several international and domestic investors had shown interest in the growth plans of the unit and added that the bank may test the market in terms of price discovery. At its recent annual general meeting in August, managing director Sashidhar Jagdishan had said that an outside investor could be brought for price discovery.
HDB Financial’s loan book of Rs 57,390 crore as of June 30 was at about 5% of HDFC Bank’s total advances of Rs 11.47 lakh crore. The lender owns 95.3% of HDB Financial with employee trusts and a few current and former bank officials owning the rest. ET had reported in December 2019 that Puri’s family investment vehicles had netted Rs 200 crore after partially liquidating his investments. In the shadow bank cohort, its cost of funds is among the lowest. The franchise has a nationwide footprint with 1,319 branches in 959 cities. HDB has three primary business lines – enterprise lending to small and medium businesses; asset financing of commercial vehicles and electronics; and short tenor consumer loans.
Most banks have had step-down NBFC subsidiaries to service a wider pool of customers with offerings that may otherwise be difficult to fit the risk profile of a bank. But with the Reserve Bank of India continuing to push banks toward capital preservation, most bank-backed NBFCs such as PNB Housing Finance have had to seek external investors for liquidity and growth support. In January, the RBI had proposed a scale-based regulatory framework for shadow banks to segregate larger entities and expose them to a stricter set of “bank-like” rules. This is aimed at protecting financial stability while ensuring that smaller NBFCs continue to enjoy light-touch regulations and grow with ease.
“This is a pedigreed franchise with a strong parentage and a robust presence in the retail finance segment. Post the Fullerton buyout, several global franchises are keen to explore investment opportunities,” said the head of a large financial institution aware of the process, on condition of anonymity. “The final guidelines of NBFC investments is also expected shortly which will further clear the regulatory air.”
Covid blues
The second Covid-19 wave had worsened asset-quality metrics, with HDB Financial Services reporting threefold increase in gross bad loans in a year. HDB had posted a gross non-performing asset (GNPA) ratio of 7.75% as on June 30, against 2.86% in the same period a year earlier. Bad loans doubled in just one quarter, a sequential comparison of numbers showed. The GNPA ratio was at 3.89% on March 31. Over the past 10-year period, the average GNPA ratio has been 1.55% and return on equity has been 13.4%.
Net profit dropped 44% to Rs 130.6 crore at the end of the June quarter, from Rs 232.7 crore a year ago. However, analysts see 19.8% capital adequacy in FY21, despite lower net profit and higher provisioning, as a positive.
Apart from the recognised bad debt, HDB Financial had restructured loans worth Rs 5,321 crore at FY21-end, according to the company’s annual report.
“Valuations may have come off the peak but are still high at a time when that of listed non-bank lenders are near their yearly lows, reflecting the premium the HDFC Group commands in an industry otherwise struggling to generate sufficient liquidity,” another investment banker told ET. “Investors are optimistic about the NBFC’s growth as it has access to cheap sources of funds through its parent and generates high margins.”
In FY21, HDB Financial sold loans worth Rs 473 crore under securitisation, with its parent buying to the tune of Rs 379 crore, according to the latest annual report. The NBFC is required to report any related-party transactions with its parent. At its last AGM held on June 25, the company got shareholder approval to conduct securitisation transactions worth Rs 7,500 crore with HDFC Bank in the current year.