HDB Financial Services IPO: Two concerns that could hurt HDFC Bank unit’s valuation

As HDB Financial Services Ltd prepares for a nearly $1.5 billion initial public offering, two key factors could affect its valuation: a recent proposal to regulate the banking group’s operations and HDB’s rising bad loans.

HDB Financial Services, in its draft red herring prospectus or IPO document, said its parent HDFC Bank Ltd may have to reduce its stake in the company to below 20 per cent if the Reserve Bank of India implements its draft proposals now. form.

Currently, HDFC Bank, India’s largest private lender, holds 94.36% of HDB Financial Services.

The Reserve Bank of India’s recent proposals on prudential regulation of business forms and investments aim to remove any duplication in the business carried out by banks and their subsidiaries.

HDB Financial Services (a non-bank financial company) and HDFC Bank offer similar products but target different borrower segments. HDB provides loans primarily to first-time borrowers and underserved customers.

While secured loans for purchase of products such as two-wheelers, consumer durables and gold account for 71% of total HDB loans, unsecured advances such as real estate loans account for another 28.9%.

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The Reserve Bank of India has proposed allowing two years to comply with the rules once finalized, and its guidelines are expected to have an impact on HDB financial services companies’ credit ratings and borrowing costs.

“If implemented as currently drafted, we understand that our promoters are expected to be required to reduce their ownership in our company to less than 20% of the equity capital (or any higher percentage with prior approval of the Reserve Bank of India), in order to continue to provide overlapping services and products. A significant reduction in our promoter’s ownership may have a material adverse effect on our business operations and share price,” HDB said in its IPO filing on October 30.

“Our bank borrowings include covenants that allow the banks to recall or reprice the underlying debt facilities if our promoters’ shareholding in our company falls below 51%. Accordingly, we may need to seek other lenders or additional sources of funding in the future to meet our borrowing requirements, our credit ratings may be adversely affected and our borrowing costs may increase,” it added.

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Non-performing loans rise

HDB Financial Services IPO $The Rs 12,500 crore will include fresh issue of equity shares and an offer for sale by HDFC Bank, which is looking to sell stakes in its NBFC unit worth up to $100 billion rupees.

The IPO will mark HDFC Group’s first public offering in six years as it rushes to meet the Reserve Bank of India’s deadline of September 2025 for “upper tier” non-banking financial companies to list.

But another big issue that could impact its IPO is the quality of the company’s loans.

HDB Financial Services’ bad loans increased last year after the Reserve Bank of India increased the risk weight of unsecured loans. While all banks and non-banks with unsecured loans saw an increase in NPAs in their unsecured loan portfolios, HDB’s NPAs grew faster compared to peer Bajaj Finance Ltd.

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HDB’s net non-performing assets rose to 0.83% at the end of September from 0.63% at the end of March. Bajaj Finance’s net NPA increased from 0.46% to 0.58% during the same period.

At the same time, HDB’s unsecured consumer finance book grew significantly, up 48% year-on-year to $As of the end of September, the loan amount was 22,473.8 billion rupees, accounting for nearly 23% of its total loans $98,624 Crores.

HDB’s total non-performing assets as a percentage of total loans stood at 2.1% at the end of September. Its return on equity is 16%, lower than Bajaj Finance’s 23.85%.

“Pricing aside, HDB Financial’s IPO journey may not be as smooth as Bajaj Housing Finance’s (September IPO),” said Geeta Kedia, senior research analyst at SPTulsian Investment Advisers. “It will keep a close eye on HDB’s asset quality, Provisions increase and growth quality. “

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