HDFC Bank to Sell Strategic Stake in Financial Services ARM

Just a couple of months back, HDFC Bank had officially put off plans of an IPO for its financial services arm, HDB Financial. Incidentally, HDB Financial is 95% owned by HDFC Bank and focuses on select retail and mid-level corporate lending. Their product portfolio includes gold loans, SME loans, car loans, commercial vehicle finance, personal loans etc.

Just a couple of months after the decision, it is reported that HDFC Bank may adopt the strategic sale route to sell a stake in HDB. HDFC Bank has already appointed Morgan Stanley to scout for a buyer for the business. HDFC Bank is of the view that in a world obsessed with digital stories, institutions may  be better positioned to grasp the strategic value of HDB.

To begin with, HDFC Bank is reportedly looking at an overall valuation of $9 billion for HDB Financial and that type of valuations may be hard to get in an IPO. HDFC bank, for now, only plans to divest about 20-25% of their overall holdings. This strategic sale is likely to become the benchmark for pricing the IPO at a future date.

HDB Financial has about 87 lakh customers across all its loan products. Its total AUM or assets under management as of the end of FY21 stood at Rs.61,567 crore. HDB contributes about 5% of the bottom line of HDFC Bank, so it is still quite small in impact terms. Even the estimated valuation of HDB at around $9 billion is just 8% of the market cap of HDFC Bank.

The real challenge for HDB in the last few quarters has been two fold. They have seen loan yields fall due to the sustained rate cuts initiated by the RBI in last 2 years. Secondly, the pandemic and its aftermath have resulted in the gross non-performing assets or Gross NPAs spike for fiscal year 2021 to 7.75% of the total book.

On the positive side, HDB enjoys net interest margins (NIMs) of 7.5%, which is best in class in the entire industry. However, the bigger challenge for Morgan Stanley will be to find a buyer for a company where NPAs have spiked and where the competition is becoming intense from the array of digital players in the market.