HDFC Bank's HDB Financial Services Gears Up for Highly Anticipated IPO

1. HDFC Bank's HDB Financial Services Gears Up for Highly Anticipated IPO HDFC Bank's non-banking financing arm, HDB Financial Services, is poised to embark on its much-awaited initial public offering (IPO) journey, awaiting the final nod from its parent company. HDB Financial Services' Core Focus and Performance HDB Financial Services' core focus areas include vehicle loans, loans against property, and personal loans. The company has diversified its product base, expanding into consumer durable financing, gold loans, digital product loans, and related segments. Despite the RBI's directive to increase risk weights on unsecured loans, HDB Financial remains confident due to its diversified loan portfolio. Less than a quarter of its loan book is unsecured. Patwardhan stated, "We have been very selective in how we do lending. Meeting customers, understanding cash flows, and having local sets of knowledge coupled with bureau information and a large digital stack allow us to look through a lot of information." HDB Financial's performance has witnessed a robust recovery, both in terms of asset growth and asset quality, after facing challenges during the pandemic. The company's asset under management (AUM) stood at ₹83,989 crore as of the end of December and has shown a Compound Annual Growth Rate (CAGR) of 8.4% in the last five years. Secured loans constitute around 75.8% of the total portfolio as of March 31, 2023, with the remaining being unsecured. HDB's gross stage 3 assets/NPA have been reduced to 2.25% as of December 31, 2023, from 2.73% as of March 31, 2023. The company's restructured book has also substantially reduced to around 0.7% of the AUM as of March 31, 2023, from 7.14% as of March 31, 2022. HDB has maintained a stage 3 provision coverage ratio of 68% as of December 2023-end. The company's profitability has witnessed an uptrend, with a strong net interest margin (NIM) of 7.7% in the last quarter (Q3FY24). While the spreads of the company have marginally contracted during 9M FY24, continued moderation in credit cost and operating expenses has enabled improvement in return metrics. Read Also:HDB Financial Awaits Parent's Approval to Begin IPO Journey Potential Valuation and Listing Implications HDB Financial Services, which holds a 94.7% stake, is strategically planning to divest around 10% in the IPO, potentially resulting in an issue size ranging from ₹7,500 to ₹10,000 crore. As a non-deposit-taking lender, HDB Financial Services is expected to achieve a valuation between

2. $9 billion to $12 billion (approximately ₹75,000 to ₹1 lakh crore) during the IPO, contingent upon market conditions. The bank has initiated discussions with leading investment banks to gauge interest and evaluate valuations for the proposed IPO. Simultaneously, there are deliberations regarding a pre-IPO share placement with potential investors. The proposed IPO of HDB Financial Services is expected to be one of the biggest public issues of the year and the first from the HDFC Group after the merger of HDFC Bank and HDFC. Currently, HDB Financial Services is valued at roughly ₹65,690 crore ($7.9 billion) based on its price of ₹830 in the unlisted market. Investors in HDB's unlisted shares have been awaiting the company's listing for the past three years. The strong brand value of the HDFC group further supports HDB's high valuation. Bajaj Finance, with a market capitalization of ₹3.96 lakh crore, is the country's largest NBFC in market value. In comparison, HDB Financial Services is poised to become one of the largest listed finance companies in terms of market capitalization upon its debut. Brokers have expressed high expectations for a robust listing from HDB Financial due to its profitability track record and strong parentage. Most HDFC Group subsidiaries have made strong stock market debuts in the past. In the unlisted market, HDB shares have gained over 30% in the past three months, with the listing buzz gaining momentum. Potential MUFG Deal and Regulatory Compliance Amid the IPO preparations, there are reports that Japan-based Mitsubishi UFJ Financial Group (MUFG) is in talks to acquire a 20% stake in HDB Financial Services for around $2 billion, valuing the company at $9-12 billion. HDFC Bank, without confirming the stake sale plans, has hinted that the proposal is being considered to meet listing requirements, and the bank is exploring all options, including the stake sale. "Our investment in HDB Financial is a financial investment. We hold around 94.8% stake. HDB is in the upper layer of NBFCs which means it needs to be listed by September 2025 under regulatory guidelines," said HDFC Bank CFO Srinivasan Vaidyanathan. "All possibilities will be evaluated to get to that end outcome, so we'll have to be patient. There are several approaches to take there, and all possibilities are under evaluation." The potential MUFG deal would mark one of the biggest financial sector transactions involving lenders of the two countries and would help HDFC Bank meet the regulatory requirement of listing HDB Financial Services by September 2025.

3. Broader Implications and Growth Prospects The upcoming IPO of HDB Financial Services is a significant milestone for the HDFC Group, as it will be the first public issue by the amalgamated entity following the merger of erstwhile HDFC with HDFC Bank, effective July 2023. The successful listing of HDB Financial Services is expected to unlock value for HDFC Bank, which holds a 94.7% stake in the subsidiary. The IPO could also pave the way for further strategic partnerships and investments in the NBFC space, as evidenced by the potential MUFG deal. Moreover, the IPO will provide HDB Financial Services with enhanced visibility, access to capital markets, and the ability to pursue its growth aspirations. The company's branch expansion plans, targeting 200 new branches this fiscal year, and its diversified product portfolio position it well for future growth. In conclusion, the impending IPO of HDB Financial Services is a highly anticipated event in the Indian financial market. The proposed issue size, valuation, and potential strategic investments underscore the strong fundamentals and growth prospects of the NBFC subsidiary. As HDFC Bank navigates the regulatory requirements and explores various options, investors and industry observers eagerly await the successful debut of HDB Financial Services on the public markets. Address: MiQB, Plot 23, Sector 18, Maruti Industrial Development Area, Opposite VLCC corporate office, Gurugram, Haryana 122015 Ph.No.: +91-70-6556-0002