Amidst the Net Interest Margin (NIM) compression experienced by the banking industry, HDFC Bank managed to sustain it on a sequential basis. The core net interest margin, according to Q3 data released by the private lender, was at 3.4 per cent on total assets, and 3.6 per cent based on interest-earning assets. Provisions in the December quarter increased to Rs 4,217 crore as against Rs 2,806 crore a year ago. Per the brokerage firms and analysts, HDFC Bank at best reported a stable NIM and the recovery may take longer. “Earlier, HDFC Bank had indicated that higher liquidity and ICRR impacted NIM, which was expected to improve, However, despite using many levers (LCR down to 110 per cent; LDR at 110 per cent), the bank, at best, reported stable NIM. With many variables at play, viz. transitionary liquidity requirement (scale has its own challenges while running tight liquidity), changing loan construct, and systemic challenges on deposits, we believe NIM recovery may take longer,” said a report by Elara Capital.
Earlier on Tuesday, HDFC Bank reported a net profit of Rs 16,372 crore for the third quarter of FY24, up 33.5 per cent from Rs 12,259 crore clocked a year ago, almost in line with the market estimates. The net interest income (NII) was at Rs 28,470 crore, up 23.9 per cent as against Rs 22,990 crore reported in the corresponding quarter of the previous fiscal.
HDFC Bank’s asset quality
The bank’s gross non-performing assets (NPA) stood at 1.26 per cent, up from 1.23 per cent last year. On the other hand, net NPA for the quarter stood at 0.31 per cent compared to 0.33 per cent last year. “HDFC Bank reported a nominal decline in its headline non-performing assets or NPAs, with a sequential dip in gross NPAs of ~8bp to ~1.26 per cent whereas net NPAs improved by ~4bp sequentially to ~0.31 per cent. The overall slippage was at Rs 78bn, against Rs 7bn last quarter, indicating that the major merger-related pain has already been recognized. The company provided Rs 12bn during the quarter against its alternate investment fund or AIF exposure on a prudent basis, despite a Rs 5bn profit on its books,” said the analysis report by InCred Equities.
“Due to the bank’s legacy of healthy credit profiling, we do not see any further deterioration in its asset quality and expect it to be stable. Also, due to the bank’s vast branch network, its subsidiaries can access large cross-selling opportunities, thus indirectly supporting the topline growth. Thus, our outlook remains positive in the medium to long term,” said Shreyansh V Shah, Research Analyst, StoxBox.
HDFC Bank’s deposit growth
In the October-December FY24 quarter, total deposits of the bank was up 27.7 per cent to Rs 28.47 lakh crore versus Rs 22.29 lakh crore in the corresponding quarter last year. Current account and savings account deposits grew by 9.5 per cent with savings account deposits at Rs 5.79 lakh crore and current account deposits at Rs 2.58 lakh crore. Analysts at InCred Equities said, “HDFC Bank reported weak 3QFY24 deposit growth of ~1.9 per cent sequentially as its management preferred to avoid wholesale deposits amid elevated pricing and volatile maturity. However, with the liquidity coverage ratio at ~110 per cent and the credit-deposit ratio at ~108 per cent, deposit momentum is much needed but the surge in high-ticket deposits may keep margins under pressure. Thus, managing deposits and margins is the key task for HDFC Bank in the coming quarters. We also believe that the bank may accelerate growth in better-yield unsecured loans to compensate for margins.”
Shreyansh V Shah from StoxBox, added, “Though the bank took a hit in its capital due to higher risk weights on unsecured loans, we believe that growth in unsecured loans has been modest. With the aim of the bank to have over 13,000 branches in the next three to five years, we remain optimistic about building momentum on deposit growth in the long run. This will improve its CASA ratio going forward.”
Ajit Kabi, Research Analyst, LKP Securities, said, “The lower LCR and slower deposit growth may limit NIMs expansion going forward. The reported NIMs of 3.6 per cent (for interest earning assets) came below expectations. The lower LCR, CDR bottleneck and slower deposit growth may squeeze NIMs going forward. We believe the street is concerned about the above factors. Nevertheless, we may witness recovery in the coming period.”
Going forward
Per InCred Equities, the elevated cost of deposits and pressure on margins would be the common issue for all banks in the coming quarters. However, it maintained that HDFC Bank is better placed due to its improved penetration providing portfolio granularity and command over loan pricing.
Meanwhile, Elara Capital analysts said, “We believe FY25 may be characterized by the nature of balance sheets and deposit franchises. Add to that, the merger for HDFC Bank has made deposit mobilization quintessential and essentially, the most discussed point by investors. With current liquidity scenario and regulator’s focus on CD ratio, we believe systemic aggression on deposits may sustain amidst HDFC Bank’s heightened needs post-merger. Thus, sustained deposit mobilization will be the key to confidence building. Also, its investment in deeper geographies may mean that it is structurally equipped to deliver strong outcomes while managing merger deliverables.”