It has been a busy week for global markets. Crude oil prices fell nearly 10% on Tuesday, touching $100 per barrel amid fears of a recession. But no one seems to agree on where oil prices are headed - while JP Morgan says oil could hit an incredible $350 per barrel if sanctions against Russia tighten, Citi is predicting $65 a barrel by the end of the year if economic growth slows.

Indian indices have inched up this week with the Nifty 50 hovering above the 16,000 level. With new quarter results coming in, we will finally see how Indian companies managed rising costs, interest rate hikes and geopolitical tensions over the past three months.

In this week’s Analyticks,

• Under its new CEO, HDFC Bank bets on technology and branch expansion to beat the competition

• New indices dashboard: Indices that gained and lost the most in Q1FY23

Let’s get into it.

A new phase for HDFC Bank under the new CEO?

The new HDFC Bank CEO Sashidhar Jagdishan has a lot to prove, having taken over the bank after the long, celebrated reign of former CEO Aditya Puri.

Under Puri, the bank's stock became an investor darling - a person putting Rs. 1 lakh into the IPO in 1995 would have over Rs. 15 crore today. But in the last one year, the stock has given negative returns and underperformed the index. To his friends and family, Jagdishan reportedly admitted that it’s been a difficult first year, and compared his entry into the CEO’s corner office to “walking into the Sabina Park cricket pitch in the 1980s and facing a battery of West Indian fast bowlers”.

For Jagdishan, the key to the bank’s future success lies in technology. The pandemic accelerated the movement of banking customers towards websites and apps. Branch visits are increasingly considered a great inconvenience. In its FY22 annual report and at the analyst day, Jagdishan said that tech is the main focus for HDFC Bank.

It's about time - the bank has lagged competitor ICICI Bank in adopting technology across its verticals and has been pulled up by RBI multiple times for server problems and website crashes. 

At the same time, Jagdishan is also planning to double the bank's branch network in the next 3-5 years, adding 1,500-2,000 branches every year. With the HDFC merger on the horizon, HDFC Bank is entering a phase of rapid expansion in FY23.

HDFC Bank wants to sell its products to HDFC’s customers

HDFC Bank’s stock has been on a roller coaster ride since the company announced the merger with Housing Development Finance Corporation (HDFC) on April 4. Both companies’ stocks rose about 10% after the announcement but investors’ enthusiasm quickly waned. Despite strong results in FY22, HDFC Bank’s stock is down close to 10%, while the Nifty 50 is flat and the Nifty Bank fell 3.2% in the same period.

HDFC Bank is eager to expand its home loan portfolio, a space in which HDFC rules. The bank’s management believes that the housing sector is a huge growth opportunity and one of the key drivers of India’s gross domestic product or GDP over the next decade. Currently, only 2% of the bank’s customers source home loans through the bank.

A home loan customer is very valuable, and typically keeps deposits that are five to seven times that of other retail customers in their bank account.  So HDFC Bank wants HDFC’s customers to bank with it, and this could give a boost to its retail deposits, which in turn would help improve the current account savings account ratio or CASA ratio. 

If this thesis works out, the bank can see an improvement in margins by bundling home loans with other offerings by cross-selling. With 70% of HDFC’s customers not banking with HDFC Bank, this presents a substantial opportunity to realize synergies from the merger.

Rise in wholesale loan mix leads to net interest margin (NIM) fall in FY22

In FY21, the management had identified focus segments that the bank. These included retail assets, commercial (micro, small, and medium enterprises or MSME) and rural banking, and corporate banking. The bank’s revenues from all these segments grew in FY22. The commercial and rural banking segment’s loan assets under management (AUM) rose by double digits - 30% YoY in FY22, while retail loan AUM grew by over 15%. 

The retail loan and wholesale loan mix for HDFC Bank was 50-50 when the pandemic hit in FY20. The share of retail used to be higher, and has been falling since FY18. In FY22, the share of the retail loan mix fell to 44%, while less profitable wholesale loans rose to a share of 56%, the highest level in four years.

As a result, the net interest margin (NIM) fell marginally by 10 basis points to 4% in FY22, as the asset mix shifted towards the high-rated, low-yielding wholesale segment. However, return on assets remained flat at 2% compared to FY21. Due to the improving asset quality mix, gross NPA ratio fell by 10 basis points to 1.2% in FY22.  

A report by Moody’s investor service expects the NIM of Indian Banks to grow in FY23, thanks to recent interest rate hikes by the RBI. Moody’s notes that while high inflation levels may hurt banks due to lower deposits, higher policy rates and favorable funding structures can contribute to margin expansion.

HDFC Bank's focus is on technology, but it will still open new branches

The management is hoping for a tech-driven transformation of the bank, and its  FY22 annual report theme is ‘reimagining the future with technology’. But imagination is easy and execution is hard, especially for a behemoth like HDFC Bank which has many intertwined, legacy tech systems, and employees who are used to doing things the old way.

It’s no surprise then, that Jagdishan has had a difficult year. And HDFC Bank is up against very nimble competitors, including young, well-funded fintech companies that are looking to take a big bite out of the old guard. 

Investments in technology usually pay off in the long run. Over 93% of HDFC bank’s transactions are now processed digitally, and HDFC Bank plans to roll out new features every 3-4 weeks, in line with what fintech companies do. However, these investments will result in higher operating expenses for the bank.

Another factor that will push operating expenses higher is the management’s rapid branch expansion plan and its high attrition rate of 25%. In FY22, HDFC Bank added 734 branches.

But now with the merger in sight, the plan is to nearly double the network in the next three to five years by opening 1,500 to 2,000 branches every year. HDFC Bank had 6,342 branches at the end of FY22.

HDFC Bank’s revenue to grow, but it may see higher operating expenses 

As it focuses on expansion, HDFC Bank has hired 57,300 employees in FY22, more than doubling its hiring from FY21 (21,500 hires in FY21). However, an increase in the branch count was not the only reason for this hiring jump. A high attrition rate of 25% in FY22 was a factor - attrition was pronounced in frontline staff/sales officers (43%) and in the <30 years’ age category (35%). These attrition levels can add to fast-rising employee costs in the coming quarters. 

While operating expenses are expected to rise with expansion plans, HDFC Bank’s revenue is set to grow on the back of a strong CASA ratio, gradual NIM expansion and a rise in non-interest income.

But with the HDFC merger expected to be completed by 2024, the bank has a lot on its plate - realizing the ambitions of its new CEO, and smoothly transitioning into a merged business.

Indices dashboards: Indices that gained and lost the most  in Q1FY23

With the new earnings season right around the corner, we look at indices that performed well over the past quarter, and at some that didn’t.

Among the top performing indices are Nifty Growth Sectors 15, BSE FMCG and BSE Auto. Each beat the Nifty50, which was down by 9.4% during the quarter.

Some of the stocks that helped the Nifty Growth Sector rise during the previous quarter were Maruti Suzuki India, Eicher Motors and Hindustan Unilever.The Nifty Growth Sectors 15 is up 3.4% in the last quarter and 12.2% in the past year. 

Even though 61 out of the 79 stocks in the BSE FMCG Sector were  in the red, stocks like Britannia Industries, VST Industries and Vadilal Industries rallied higher, which kept  the BSE FMCG Sector index in the green in Q1FY23 (up 4.6%). 

Aided by the positive monthly growth in wholesale dispatches and retail sales in the auto sector, the BSE Auto index rose 2.2% last week. Overall, the index rose 8.27% in Q1FY23 as Maruti Suzuki India, Mahindra & Mahindra and Tata Motors posted good monthly sales during Q1FY23.

On the other hand, the Nifty Metal, Nifty IT and S&P BSE Basic Materials were the indices that lost the most. Each of these indices underperformed Nifty 50, which is down by 9.4% in Q1FY23. The metal sector has been under selling pressure since the Centre imposed a 15% export duty on finished steel products. Stocks like Tata Steel, JSW Steel and Hindalco Industries were the biggest contributors to the Nifty Metal’s 30.7% fall in Q1FY23.

The  Nifty IT fell 23.7% in Q1FY23 with all 10 of its constituents trading in the red, as investors fret over what a looming recession in the US and Europe would mean for IT services companies. 

Out of the 187 constituents of the S&P BSE Basic Material index, 161 are trading in the red with Ultratech Cement, Pidilite Industries, Hindustan Zinc and Vedanta being the biggest contributors to the index’s 23.17% fall in Q1FY23.

You can check out the dashboards here.