HDFC Bank decision to refrain from price war on deposits and infra bonds will help improve NIM: Analysts

Effectively, the bank will not be required to set aside cash reserve ratio (CRR) and statutory reserve ratio on the infrastructure bonds. HDFC Bank absorbed HDFC Ltd's Rs 1 lakh crore infra bonds following the merger, effective July 2023. However, despite being classified as infra bonds, RBI mandated the bank to set aside 4.5% CRR, which does not yield any returns, and invest 18% in sovereign bonds classified as SLR.

"HDFC Bank's infra bond raise is significant, which indicates a strategic move to bolster its capital base and potentially expand its lending activities, especially in infrastructure projects. It is possible that they may borrow the maximum percentage in infrastructure bonds compared to AT1 and Tier 2 bonds," said Venkatakrishnan Srinivasan, founder of Rockfort Fincap, which is into bond syndication and structuring.

HDFC Bank raised Rs 2,910 crore at 7.65% in March and Rs 7,425 crore at 7.71% last December as infrastructure bonds.

If the bank can raise bonds at the same level and deploy them at 9-10%, it will positively impact the net interest margin. The bank's net interest margin improved four basis points on a quarter-on-quarter basis to 3.44% in March 2024.

"While there was no explicit near-term guidance, management expects a steady improvement in NIMs in the medium term (2-3 years) on a change in product mix (towards high-yielding retail and SME loans) and replacement of high-cost liabilities acquired from erstwhile HDFC Ltd. Management is maintaining its focus on expanding the distribution network," said a research report by Macquarie while maintaining a buy.

Antique Stock Broking Ltd, while maintaining a buy, said that could be under pressure while PhilipCapital maintained a buy but with a revised target of Rs 1800 a share compared to Rs 1920 earlier.

The shares of HDFC Bank fell 1.2% to close at Rs 1512 a share while the BSE Sensex rose 0.77% on Monday.