HDFC Bank’s NPAs rise on farm loan slippages, focus on bringing loan-to-deposit ratio below 90%

Mumbai: In a quarter of otherwise stable financials, HDFC Bank Ltd.’s asset quality put a dampener on its earnings with non-performing assets rising, owing to an increase in agriculture loan slippages. 

The country’s largest private sector lender attributed this deterioration in loan quality to cyclical impact of the agriculture segment and said that the bank’s focus continues to be on deposit mobilisation and improving its loan-to-deposit ratio (LDR).

The slippage ratio for the current quarter was 35 basis points (bps) amounting to around ₹8,800 crore. Excluding agriculture loans, this ratio was around 26 bps, flat from the previous quarter, chief financial officer Srinivasan Vaidyanathan said in the bank’s earnings call.

“Excluding agriculture loans, because in June and December quarters you see the crop season impact, the slippages were flat,” Vaidyanathan said. Credit costs, too, were largely stable excluding the impact of the agriculture segment, he said, adding that credit costs for other retail loan segments were largely stable.

Gross NPA ratio of the bank was at 1.42% as on 31 December, worse than 1.36% in the previous quarter and 1.26% in the previous year. Excluding agriculture loan NPAs, the gross NPA ratio was 1.19% at the end of December, flat compared with the previous quarter but slightly worse than 1.11% a year ago. Net NPA ratio stood at 0.5% at the end of December, also higher than 0.4% a quarter ago and 0.3% a year ago.

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Provisions for the quarter were ₹3,150 crore, 25.3% lower on year but 16.7% higher sequentially owing to the hit on the agriculture portfolio.

Expenses, distribution

Combined with worsening asset quality, weak growth in other income also weighed on the bank’s bottomline. Other income for the quarter was ₹11,450 crore, up only 2.8% on-year, largely due to a significant reduction in trading gains which fell to ₹70 crore from ₹1,470 crore in the corresponding quarter of the previous year. Operating expenses, too, rose 7.2% on-year and 1.3% on-quarter to ₹17,110 crore, due to the bank’s branch expansion initiatives for deposit mobilisation.

The bank had added close to 1,000 branches in FY24 and another 405 branches in FY25 so far, of which 51 were added in the reporting quarter. Vaidyanathan said the bank will continue to invest for the time being, not just for branch expansion but also to improve branch and employee productivity and customer engagement. The bank added 19 lakh customers in Q3 and 20 lakh in Q2, after adding about 90 lakh new customers in FY24.

HDFC Bank posted a net profit of ₹16,740 crore for Q3 FY25, a muted growth of 2.2% on year. Sequentially, the profit after tax was 0.5% lower.

Loan, deposit growth

HDFC Bank’s gross advances were at ₹25.4 trillion as of 31 December, up 3% on-year and 0.9% on-quarter. The muted loan growth is in line with the bank’s strategic slowdown in credit so as to focus on deposit accretion and improve the LDR. Retail loans grew 10.0% on-year, and commercial and rural banking loans 11.6%, whereas corporate and other wholesale loans fell 10.4%. Overseas advances constituted 1.8% of total advances.

The bank’s retail loan book currently accounts for about 58% of total loans, whereas wholesale loans account for 42%. Vaidyanathan said despite the bank having becoming more cautious and “tighter” on retail loans in the past two years, the bias remains towards retail loans as that is where the bank has invested, sees more growth opportunity, and has market leadership in those kinds of product lines. While wholesale loans continue to be important, especially as a “feeder” to the bank’s salary account relationships, the segment continues to be very price sensitive and margins are “very tight”.

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Net interest income (NII) for the quarter grew 7.7% on-year to ₹30,650 crore. Core net interest margin (NIM) was at 3.43% on total assets compared with 3.5% a quarter ago and 3.4% a year ago.

Vaidyanathan said that margins were “range bound with an upward bias” and have been largely stable compared with some other industry players, given that the positioning and modified duration of the assets and liabilities remains “fairly matched”.

Deposits of the bank were at ₹25.6 trillion, higher by 15.8% on year and 2.5% on quarter. CASA (current account and savings account) deposits were up 4.4% on year at ₹8.7 trillion, accounting for 34% of total deposits. Time deposits were at ₹16.9 trillion, recording an increase of 22.7% on year.

The bank aims to continue to improve its LDR with the aim of bringing it down to the pre-merger levels of below 90%, Vaidyanathan said.

“Traditionally, the bank has operated between 85-90% CD ratio, so we want to get to that level. About a year ago, we thought we will get to that level in 4-5 years but as we evolve, we found what was happening in the market is that overall credit growth is coming down. We took that opportunity to accelerate the reduction in loan growth,” Vaidyanathan said, adding that even as deposit mobilisation efforts continue, the focus is on modulating the rate of credit growth.

He added that in FY25 the bank will grow slower than the system, in FY26 it will grow in line with system growth and then in FY27 it will grow higher than the system “thereby capturing market share” like it used to in the past.

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Meanwhile, to moderate the credit growth, the bank will continue to scale up loans sales over the next 2-3 years as the endeavour is to engage with the customer, get the customer relationship to be able to cross-sell products and “not necessarily keep it on the balance sheet”.

“This is the beginning that we have done. It’s in the experimentation stage and as it succeeds and as we get more investors on the table, scaling of that can happen,” he said, adding these sales will largely be of mortgage and auto loans as these are seeing the most investor interest.

The bank securitised loans worth ₹21,600 crore during the reporting quarter and a total of ₹35,000 crore in the nine-month period ended December.