Our asset quality continues to remain healthy: CEO HDFC Bank’s message to stakeholders
Let me start by wishing all of you a happy and healthy future. The pandemic has clearly reinforced the message that Health is Wealth.
If FY21 saw the darkest period of the pandemic, then the last financial year was the year of hope. Though the pandemic did not disappear, the nationwide roll-out of the vaccine programme meant that lives were more secure, and coupled with precautions, people could get back to some degree of normalcy.
With the period of uncertainty mostly behind us, I believe a more positive macroeconomic outlook dominates the executive agenda, across industries. While there are headwinds in the form of rising inflation and the Ukraine crisis, among several others, India is expected to grow 7.3% and is likely to be the fastest-growing major economy in the world in FY23 with the strength to absorb external shocks.
Our Balance Sheet has been resilient during the pandemic and has grown further. Our asset quality continues to remain healthy and amongst the best in the industry. Our Balance Sheet increased by 18.4% to ₹20,68,535 Cr and Net Profit increased by 18.8% to ₹36,961.3 Cr. GNPA decreased to 1.17% from 1.32%. ROA (average) was at a healthy 2.03% and ROE at a healthy 16.9%. Our commitment to shareholders remained high with a proposed dividend payout of ₹15.50 (Fifteen Rupees Fifty Paise only) per equity share of ₹1 (Rupee 1 only), which translates to a dividend pay-out ratio of 23.28% for the financial year ended March 31, 2022.
I would like to say a heartfelt ‘Thank You’ to all my colleagues for this performance. Each one of the one lakh forty-one thousand plus members of the HDFC Bank family gave their best in truly challenging times, so we could serve you as we have for decades. Words cannot adequately convey my gratitude to them.
In my letter to you all last year, I had highlighted my key focus areas. Improving technology resilience, a clear focus on three Cs — Culture, Conscience and Customer and building for the future.
Let me now focus on these.
Last year I had said that technology continues to remain both a strength as well as an area of improvement. Strength, as without this, we could not have grown to be a bank of this scale and increased our market share consistently. However, our customers faced some technology-related issues in accessing the Bank’s products and services during the previous year, which had led to some regulatory action, last fiscal.
I am happy to inform you that thanks to the progress we have made on our technology investments, processes and governance, the regulatory actions have been fully lifted. We converted the challenge into an opportunity and have made substantial strides in the way we evaluate, manage and operationalise our technology. To enable the infusion of a modern technology platform one needs to lay a very strong foundation and we have done that over the last one year, through a series of technology-led initiatives that include i) changes at the foundational level ii) creating new digital solutions iii) modernising the core.
i) At the foundational level, we have
Shifted our primary data centres to state-of-the-art brand-new facilities in Mumbai and Bengaluru, to support higher uptimes and create a robust IT backbone for our operations.
A clearly defined capacity monitoring programme to proactively manage capacity upgrades across all key applications.
A technology obsolescence programme management office to plan and replace obsolescent components.
Started putting in place next-gen disaster recovery (DR) set up for key applications.
Implemented landing zone architecture to leverage the cloud resilience, with elastic scalability, and at the same time have control over ecosystem on cloud.
Implemented a new Application Programming Interface (API) gateway and a new API development framework.
Kick-started modernisation of our data warehouse with a cloud-enabled data lake platform, that would enable us to leverage AI/ML models and new age deep learning capabilities on the rich data set that we have.
ii) Creating new age solutions through Digital Factory
Rebuilding of our acquisition journeys in partnership with a global technology leader in user experience. We have already built 10 new journeys and will be rapidly rolling out new journeys every 3 weeks. This includes journeys across account opening, loans and cards, covering both individual/MSME customers and both existing and new-to-bank customers.
We have launched ‘Xpress Car Loans’ – an end-to-end digital car loan journey for existing customers as well as non-customers, that allows them to avail disbursement in 30 mins, with credit decisions based on speedy data analysis. This is a first in the Indian industry and the Bank has integrated its lending application with automobile dealers across the country.
In the next few quarters, we will launch more of our products and services under Digital 2.0 including a new payments platform for our customers, payments platform for our merchants and a wealth platform — all in partnerships with new age tech companies.
iii) Modernising the core
The digital partnership strategy will help us to modernise existing experiences quickly without changing the legacy core. It is imperative that the Bank has a long-term vision on revamping its core banking and mobile channel experiences. Toward this we have created our ‘Enterprise Factory’ wherein the Bank’s tech and digital teams work in a new age start-up like environment and co-create deep tech IP capabilities. This is a departure from the past where our technology IP was largely partner-owned and enabled. We believe that as banks become more digital, they also need to have in-house foundational technology capabilities to compete with neo-techs. Toward this, the Bank has started two very strategic initiatives:
‘Hollow the Core’ Strategy — The Bank, in partnership with a new age start-up (with deep experience in core banking technology), is co-creating new core banking modules. This project will enable the moving out of payments module from existing core banking platform and help in creating a fully resilient active active payments architecture that will ensure minimal payments downtime, even if core banking is not available. This 15-month project will be followed by hollowing the customer master modules from its existing core systems and will ensure a single system of record for customers across various products.
Rewrite Mobile and NetBanking Applications — The Bank has set up a new centre in Bengaluru and the team here is re-writing the Mobile and NetBanking platforms. The entire project will be completed in a 2-year time frame and will allow the Bank to own a modern cloud enabled Mobile/NetBanking platform. Enabling a new age experience for customers, we will roll out new features every 3 to 4 weeks, in line with digital fintech companies.
To summarise, our entire technology and digital strategy adopts a 360-degree approach that ensures resilience and modernisation of existing legacy systems and enables new age consumer experiences by partnering with modern neotechs. We have made rapid strides in creating the foundation and enabling new digital assets over the last one year. Needless to say, the pace will only pick up from here. Firmly committed to this transformation, the Bank will continue to invest in modern technology and talent.
Customer focus has been a core value for years and maintaining the highest possible standards in customer service has been the key to our success.
We are institutionalising a Service First culture at the Bank. Service First for us means respecting every customer and addressing their enquiries or complaints on time/every time, and working on the issues raised for a permanent fix. Service First for us is a commitment right from me and my colleagues to put a smile on our customers’ faces.
We have a two-pronged approach to achieve this. First, a culture of evangelisation right from the top and sensitising all our colleagues to be at the forefront of solving customer issues. Second, a strong measurement metric to be in place to continuously know that we are progressing in the right direction.
We have invested in tools and technology to ensure that some of the issues that customers face do not arise at all. For example, our MobileBanking app has been upgraded with wrapper technology that prevents fraudsters from reading OTPs, thereby preventing frauds and related complaints.
A strong bottom-up Net Promoter System (NPS) programme (‘Infinite Smiles’) covers customer interactions across all products/services and delivery channels. We actively poll our customers after their interactions with the Bank (>63 Million customers polled during the financial year), listen to their feedback, and engage with them if we have not been up to the mark. I am happy to state that we lead the overall NPS ranking among 20+ competitors in the banking category, based on a competitive benchmarking study of NPS, which was done by an industry-leading consultancy firm.
Our performance on complaints resolution has also improved markedly during the year with significantly reduced customer complaints in the Credit Cards, Debit Cards, Operations and Collections front (complaints reduced by 21%). We are not complacent about the progress and are being conscious and mindful of much more that needs to improve. We are working on several strategic initiatives (like the wrapper technology I mentioned earlier) to tackle complaints pertaining to ‘Disputed Transactions’ (where the customer succumbs to phishing attacks by fraudsters).
As part of our technology transformation agenda, we are also investing in an omni-channel customer experience platform. This will enable our customers to reach out to us through their preferred channel for service i.e., social, email, texts, voice, etc. It would also provide us a single source of customer truth across channels and would enable our frontline staff to solve customer queries and act on customer instructions in a straight through manner. This capability will improve our customer responsiveness and NPS. We are already live with our social media and email interactions on this platform and will add other channels of customer interactions during the course of this year.
Customer delight is a non-negotiable goal towards which we will continue to work.
For me, creating a good culture is as much a priority as driving growth. I am committed, along with my senior management colleagues, to walk the talk on culture.
An organisation is made of people, and it is the people that deliver the organisation to all the stakeholders. We have a talent pool of 1,41,000+ colleagues who are the Bank to our customers. We are ensuring that the supervisory pool of 12,000 odd colleagues including the senior management, is responsible for nurturing the vastly talented front line, hand hold them in their personal and professional growth and create a great working environment.
You could well accuse us of being on an overdrive on our culture agenda. We continue to work towards creating an organisation where diversity and inclusion becomes a part of the DNA, where differences are valued and respected, where conversations are friendly and warm and where the emotional needs of our colleagues and customers are fulfilled.
To enhance our employee capabilities, we are fostering a culture of Nurture, Care and Collaborate (NCC) in the organisation. Customers experience the organisation through the employees and employees experience the organisation through their managers.
At HDFC Bank, we continuously measure our employee performance engagement scores. While our engagement scores are healthy at 83%, we still believe we have a long road to travel. Through our NCC intervention, 12,000+ people managers are certified on the elements of our culture pillars and the role they play as culture custodians. Our people managers are also continuously provided with various trainings and tools to improve themselves professionally. We will keep listening to our colleagues’ feedback and keep evolving our people management practices – it’s a continuing investment that we will keep making.
Building for the Future
Last year I had spoken about Project Future Ready, to catalyse, create and capture the next wave of growth. We had clearly spelt out the following as growth engines — Retail Assets, Commercial (MSME) and Rural Banking, Corporate Banking, Government and Institutional Banking, Wealth Management, and Payments. to be driven by our delivery channels of Branch Banking, Tele-Sales/Service/Relationship and Digital Marketing. These growth engines can be broadly classified as Business Verticals and Delivery Channels. They will be powered by our robust technology and digital platforms and will account for the bulk of our future investments.
We have seen progress across our growth engines. Our focus on the MSME sector is paying off, with our Commercial and Rural Banking Group emerging as a strong growth driver (up 30.4%). We leveraged the opportunity available in the Corporate Banking sector (up 17.4%) without any compromise on our ROA. We are expanding our wealth management services to more cities and towns (now 700+ towns). Our Retail Loans continue to grow in the same pristine way (up 15.2%). Our Payments business is starting to recover well, post the lifting of the embargo and with the slew of new launches completed.
Branch Banking is the fulcrum of our customer relationships. We believe both physical proximity to and emotional connect with our customers are equally important. Our addition of 734 branches even during the tough pandemic year has served us well and we are closely tracking the success metrics of per branch profitability and productivity. Our relationship management has been further strengthened by the tele sales-service-relationship vertical with enhanced investments in both people and technology capabilities (29% increase in customers managed with 40% plus increase in business). Digital Marketing continues to make strides as a new delivery channel, creating and harnessing the traffic (up 15%) on our digital properties and contributing to direct business generation.
Our core enabling functions of Internal Audit, Credit and Underwriting, Risk Management and Compliance/Governance are being strengthened even further to support our growth.
Merger – The Power of One
Now, let me come to the proposed merger with HDFC Ltd. We look forward to the phenomenal set of talent, deep product knowledge and expertise, the processes, and systems that HDFC Ltd will add to the Bank’s existing ones.
On April 4, 2022, the two institutions had announced a transformational merger that is subject to various regulatory approvals and will take effect in about 15 to 18 months. The questions that have been asked are —why? and why now?
Why the Merger?
Quite simply, this is an opportunity we cannot afford to miss. Home loans are an emotional product and bring with them a host of accelerated benefits for the Bank. Today the environment for buying a home has changed. RERA has ensured greater transparency in the process. Price corrections in the property market have seen inventories come down. Also, rising incomes mean that home loan EMIs have come down as a percentage of a person’s income. Thanks to the penetration of telecom, internet and television services, the desire to own better homes has increased across the country. All this means that housing is going to be a huge growth opportunity and one of the key drivers of India’s GDP over the next decade.
Further, only 2% of our customers source their home loans through us, while 5% do it from other institutions. The latter is equivalent to the size of our retail book. Home loan customers typically keep deposits that are 5 to 7 times that of other retail customers. And about 70% of HDFC Ltd.’s customers do not bank with us. All these give us an idea about the size of the opportunity. The long tenor nature of home loans provides resiliency to the balance sheet. The Bank is one of the largest consumer durable financiers in the country. We can easily bundle this with a home loan, as with every home loan, there is a propensity of a customer to take new consumer durables. It is this kind of bundling that will increase margins. With the advantage of a lower cost of funds and the phenomenal distribution muscle that we have built, it is imperative that we seize this opportunity.
There have been other favourable factors too. In the last few years, the regulatory arbitrage between banks and NBFCs has come down substantially. Today reserve requirements have come down to about 22% from 26%. Both institutions are well capitalised and have surplus liquidity and a strong portfolio of investments in Government securities. The increase in priority sector lending that we need to do, due to the merger, is possible now with our own increased focus on MSMEs, the affordable housing loans that we can do and the well-developed PSL certificate market. All this means that on the day of the merger there may not be any need to raise further funds to meet reserve requirements. The addition of the home mortgages portfolio on our Balance Sheet makes it more diversified and robust.
The enhanced capital position of the Bank post the merger also means that we can take bigger exposures in leading corporates and power the country’s infrastructure build out.
The key focus area for the Bank to absorb this growth opportunity is to secure enhanced liabilities to fund future growth. The branch network has been a key deposit mobilisation engine during its 27 years of growth, leading in customer acquisition, customer retention and advertising the solidity of the Bank and hence garnering liabilities by becoming the primary banking partner for our customers. India continues to be under-penetrated and underserved from a banking perspective. The density of branches for the population of this country is way below that of OECD countries. This is where our branch banking strategy comes in. Today we have 6,000+ branches across India, and we plan to nearly double our network in the next three to five years by opening 1,500 to 2,000 branches every year. The branch will be digital from a customer on-boarding and transaction/servicing perspective. It will provide the emotional connect and relationship management necessary for offering financial solutions to our customers. These branches will be small in size and will be phygital relationship centres. This will enable us to go after the catchment more aggressively and build the required liability franchise that we are known for, and we are confident that we would execute well.
Environment, Social and Governance Strategy
The last two years has reminded all of us that our destinies are interconnected. Our ESG strategy is based on this interconnectedness, especially in the Environment and Social spheres. Climate change can disrupt both lives and livelihoods. Also, none of us should forget that the world belongs to the coming generations as much as to us.
We have already committed to becoming carbon neutral by FY32. ESG is being made an integral part of our credit assessment process. While assessment of environment and social factors has been a part of credit diligence, particularly in project financing above a certain threshold, we have recently introduced a comprehensive ESG assessment framework in corporate lending and with a wider target coverage. The objective at this stage is to create more awareness among our corporate borrowers, assess their position and understand their initiatives on ESG. Over the next 2 to 3 years, we would be looking to make it one of the key criteria in credit decisioning.
Our commitment to social good remains unwavering. Through our CSR initiatives under Parivartan we have already potentially impacted 9.6 Crore+ lives. That is an addition of about 1 Crore lives since last year. We are driving inclusivity and diversity within our organisation, with a special focus on further enhancing gender diversity.
We believe that good corporate governance is a product of culture and conscience and for us, profitability and growth cannot come at the cost of these. Our focus on compliance and assurance functions is unwavering and every aspect of compliance is adhered to with all sincerity, completeness and within requisite timelines. We ensure that every commitment given to our regulators is done on time, in its full form and substance.
Customers are the very reason for our existence and are at the heart of everything we do. To reiterate what I said last year, all individuals must ask themselves — am I doing the right thing for the customer? Am I doing the right thing for the organisation? Does my conscience permit this? As a Bank we have always taken pride in our integrity. I had also said last year that at an organisational level there is a greater focus on the role of Credit, Risk, Compliance, Audit and other enabling functions, and that focus continues.
I would end by thanking my colleagues, who have given their utmost to the Bank in two of the most trying years in human history, and all our stakeholders who have kept their faith in us. Yes, business and professional goals are essential. However, it is even more essential to not lose the human touch at the workplace and in our personal lives. Compassion, care and understanding enrich both the giver and the receiver. Thank you all once again.
HDFC Bank already had a huge opportunity with the under-penetration of banking services in the country. The proposed merger adds an entirely different dimension to the future. We believe that the runway is huge, and we can potentially add an HDFC Bank every five years. We are excited about the future and are confident that we will continue to have all our stakeholders’ support and trust, as we embark on this exciting new journey.
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