Five things investors should watch out for in HDFC Bank results on 22 January

HDFC Bank’s provisional numbers for Q3 FY25 revealed muted loan growth, much below the industry level, as the bank focused on deposit accretion and improving its loan-to-deposit ratio (LDR). Given the significant shortfall in deposits following the merger of HDFC Ltd with the bank in July 2023, the lender has been strategically going slower on advances to build the liability side of the book.

The largest private sector lender, HDFC Bank, saw loans grow the slowest among peer banks, at only 3% on year and 0.9% on quarter, also due to aggressive portfolio sales during the period. The lender’s deposits were 15.8% higher on year and 2.5% on quarter.

“Deposit growth was led by a sharp growth in term deposits (+23% y-o-y), as the Casa (current account and savings account) ratio declined to 34% (-130 bps q-o-q). Loan growth declined further from 7% year-on-year (y-o-y) in Q2 FY25 due to a system-wide slowdown in loan growth and the bank’s continued securitization of its loan portfolio,” Bernstein Research said in a note.

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HDFC Bank remains a favourite of analysts, especially among large banks, as some peers struggle with asset quality issues—in the microfinance and small-ticket unsecured portfolios. Most brokerages have a positive outlook on the bank, with price targets in the range of ₹2,300 and ₹2,550.

Mint takes a look at five things to watch out for as the bank declares its Q3 FY25 financials on 22 January:

Management commentary on credit-deposit

Despite the significant pick-up in deposits during the quarter, HDFC Bank has some way to go before it achieves the optimal LDR. This means that the bank’s strategy on future deposit accretion and the management commentary on expected deposit growth will continue to be keenly watched. As such, analysts said, the resultant impact on the trajectory of margins and overall stability of the bank’s asset-liability management will remain in focus.

Macquarie Research said it has factored in deposit growth of 15% y-o-y for FY25, which implies 6.8% quarter-on-quarter (q-o-q) growth and a ₹1.7 trillion deposit accretion in Q4.

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“Given the Q4 seasonality and the deposit mobilisation witnessed last year in Q4FY24 (7.5% q-o-q growth, ₹1.7 trillion deposits mobilized), this target looks achievable to us and appears to be a good outcome given the system deposit growth expectation of 11% levels,” the research firm said.

Loan securitisation

HDFC Bank securitised loans worth ₹21,600 crore during the quarter. Retail loans grew 10% on year, commercial and rural banking loans by 12%, whereas corporate loans declined by 10%.

The bank is expected to continue offloading some small-ticket loans and low-yielding corporate loans as it consolidates its loan portfolio in an attempt to focus on the liability side.

Macquarie expects some moderation in retail and CRB (commercial and rural banking) growth, whereas wholesale loans are expected to increase. Loan growth at 6% y-o-y and 2% q-o-q was in line with expectations of the bank’s consolidation strategy.

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“There was some moderation in retail (up 1.9% q-o-q) and CRB growth (up 1.5% q-o-q). We think there could have been some sell-down of retail loans this quarter,” the research firm said.

Stable net interest margin (NIM)

HDFC Bank’s credit-deposit ratio is expected to improve in the reporting quarter as deposit growth far outpaced credit growth. As a result, margins are also expected to remain stable with a slight positive bias as operating expenditure is also seen steady, Axis Securities said in a note.

Margins are expected to improve gradually over the medium term as the LDR improves further and incremental deposits replace the high-cost borrowings of the former HDFC, improvement in loan mix and positive spread on securitised loans, analysts said, pegging margins for the quarter at around 3.6%—flat on year and better by about 5 basis points (bps) sequentially.

Jefferies expects margins to rise from 3.6% in FY24 to 3.8% in FY27, aiding the bank’s earnings growth in the medium term.

Return on assets (RoA) trajectory

“A combination of slower loan growth and a healthy deposit growth hence resulted in a further normalization of the LDR (-150 bps q-o-q),” Bernstein Research said. While the numbers seem positive, slower loan growth will mean that the bank will require a q-o-q improvement in RoA to maintain its improving EPS (earnings per share) growth trajectory.

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BNP Paribas said that its estimates of key fundamentals, including RoA and return on equity (RoE), build in a considerable margin of safety by assuming an accelerated timeline for Priority Sector Lending (PSL) asset build-up, muted Casa momentum and no expected savings in operating cost from merger synergies.

“Despite these conservative assumptions, we see ROA touching 1.9% in FY26 and ROE nearing the pre-merger steady state of 17% by FY27. A valuation of 2x 1-year forward core BVPS (deep discount to long-term average) does scarce justice to an FY26E core ROE of 14.9% that compares favourably with its pre-merger past five-year average,” the note said.

Asset quality

Unlike some of its peers which are facing asset quality issues, especially in the microfinance and small-ticket unsecured portfolios, HDFC Bank’s asset quality is expected to remain stable on the back of controlled slippages.

“The bank can sustain stable asset quality given its unsecured loans have grown at half the pace of sector,” Jefferies said in a note, adding that it sees credit costs at around 50-55 bps over FY26-27.