HDFC Bank Q3 Results Review: Tight Liquidity To Impact Net Interest Margin, Say Analysts

Tight liquidity faced by HDFC Bank Ltd. is likely to impact its net interest margin, according to analysts. The private lender had to sell government securities to maintain its margin in the third quarter, leading to a dip in its liquidity coverage ratio, analysts said.

The bank's net profit rose 2.5% year-on-year to Rs 16,373 crore in the October–December quarter, according to an exchange filing. This was in line with the Bloomberg estimate of Rs 15,763 crore for the quarter.

The private lender's core net interest margin stood at 3.4% as of Dec. 31, and at 3.6% on an interest earning assets basis.

“In our view, there is no excess liquidity that the bank carries, and any margin improvement has to be driven by an increase in retail and SME loans relative to corporate loans," Macquarie Capital said.

Figures are not comparable year-on-year as HDFC Bank concluded the merger with Housing Development Finance Corp. in July 2023.

The bank's loan growth was healthy, driven by growth in retail and continued traction in commercial and rural banking, Motilal Oswal said in its report. Gross advances at the bank rose to Rs 22.64 lakh crore during the reporting quarter, 5.1% higher on a quarterly basis.

On provisions, the bank saw a sharp increase of 50% due to the one-off impact of provisions on investments in alternative investment fund. Provisions rose to Rs 4,216.6 crore in the reporting quarter, up 50% year-on-year. The provision number for the quarter is inclusive of contingent provisions worth Rs 1,212 crore.

The contingent provisions are on account of investments in alternative investment funds, said Srinivasan Vaidyanathan, CFO at HDFC Bank, in the post-earnings media briefing.

"The bank made a big contingency provision towards AIF of Rs 12 billion, though the value is 5% higher than the carrying value. This was, however, offset by a big tax reversal," Nuvama Institutional Equities said in a note.

Here's what the analysts said about HDFC Bank's Q3 results:

Bernstein Research

• 'Outperform' with a target price of Rs 2,200

• A 2% year-on-year decline in earnings per share sums up the terrible

  quarter for the bank.

• The bank had to take the lower tax expense route to maintain a 2% return on assets.

• Deposit growth was weak, resulting in an incremental LDR of more than 200%.

Macquarie Capital

• Maintain 'outperform' rating with target price of Rs 2,075 apiece.

• HDFC Bank’s profit beat was helped by lower taxes.

• Pre-provision operating profit matched estimates due to slightly higher Treasury profits.

• The lender managed to maintain NIMs by selling government

  securities.

Citigroup

• Maintain 'buy' but cuts target price to Rs 2,050 apiece from Rs 2,100 per share

• Earnings beat were partly driven by tax reversals.

• Having maxed out on the liquidity coverage ratio, “visibility fades on growth” as well as on net interest margin.

• It is critical for deposit growth to outpace loan growth.

• Besides the portfolio mix shift towards retail and refinance of borrowings, NIM expansion levers are limited in the immediate term.

• Branch rollout too missed guidance of adding 800-1,000 branches in FY24. The bank has added 270 branches in nine months.

• Operating leverage and benign credit cost will be key to RoA stability.

• Cut loan growth estimate to 16% for FY25 and expect NIMs at 3.6%.

• PAT revised downwards by 4-5% for FY25 and FY26.

Nuvama Institutional Equities

• Non-core items led to a 3% outperformance on earnings.

• Cuts earnings estimate by 5%–6% for FY25 and FY26

• The bank has exhausted its liquidity coverage ratio, will need to lower its loan-to-deposit ratio, and is running slower than guidance on deposit growth.

• Downgrades to hold from buy; cuts price target to Rs 1,730 from Rs 1,770

Motilal Oswal Financial Services

• The bank has maintained a 0.6% buffer of floating and contingent provisions, which provides additional comfort.

• Expect faster deposit growth at 19% CAGR and loan growth to sustain at 17% CAGR over FY24–26.

• Return on assets in FY26 is seen at 1.9%; return on earnings is expected at 16.7%.

• Reiterate the 'buy' rating with a target price of Rs 1,950 apiece.

ICICI Securities

• NIM improvement is contingent on a favourable loan mix, CASA accretion and funding mix change, which are likely to be gradual.

• Maintain 'add' at the target price of Rs 1,850 per share from Rs 1,750 earlier.

• Expect the bank's credit costs and asset quality to remain comfortable.

• Estimate loan growth at 15–16% year-on-year for FY25–26.

• With LDR at 110%, the bank needs to step up deposit growth as a higher LDR could constrain loan growth in the near-medium term.

• We see a tight rope walk for HDFC Bank as it does not want to differentiate on pricing but needs to have much faster deposit growth to sustain current loan growth.