
HDFC Bank turns in a steady Q3 while walking a loan growth tightrope
Summary
- HDFC Bank's impressive performance in the December quarter was smudged by its high loan-deposit ratio, which the management will have to navigate to achieve their industry-beating ambitions.
HDFC Bank Ltd performed well in the December quarter but reported a high loan-deposit ratio (LDR) of 98%, indicating less-than-ideal liquidity to cover urgent fund requirements.
The lender wants to grow its advances in line with industry levels in 2025-26 and higher than industry levels the following year. That would be difficult given HDFC Bank’s focus on lowering its LDR to 90%.
Assuming a deposit growth rate of 15% in FY26, similar to that in the December quarter, the bank’s on-book advances can grow by about 10%. HDFC Bank aims to expand its loan book faster than the industry in FY27, but to do that it would have to sell down its loan book to lower its LDR.
In the December quarter (Q3FY25), HDFC Bank’s core net income—net interest income plus fee-based income—increased 10% year-on-year to ₹38,853 crore. Thanks to a 19% increase in fee income to ₹8,200 crore, the bank was able to overcome the adverse impact of high LDR on loan growth.
The only fee income stream that did not grow and stayed flat was on retail assets at ₹1,394 crore, as there was hardly any growth in the bank’s on-book lending.
Operating costs in the third quarter increased 7.2% year-on-year as the bank spent on adding more than 1,000 branches, upgrading its technology, and increasing wages. With India’s inflation rate at about 5%, HDFC Bank could manage its costs well.
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Where are the merger synergies?
HDFC Bank’s core pre-provisioning operating profit in the third quarter rose 12% to ₹21,747 crore, while provisions fell by 25% to ₹3,154 crore. Provisioning refers to banks setting aside funds to cover potential losses from rising bad loans or other transactions.
During the management’s post-earnings call, analysts raised concerns that the bank’s provision coverage ratio for specific loans, including agricultural loans, had dropped to 68% in Q3 from 75% in the same year-earlier period.
The management responded that the provision coverage ratio depends on factors such as the mix of secured or unsecured non-performing assets, or bad loans, and the vintage of the NPAs. Unsecured and older NPAs require higher provisioning.
The lender reported a marginal deterioration in its asset quality. Gross NPA rose to 1.42% in the December quarter from 1.36% a year earlier, and net NPA to 0.46% from 0.41%.
That said, HDFC Bank is unlikely to suffer from the ongoing stress in the microfinance segment as such loans account for just 1% of its total loan book.
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Importantly, even six quarters after HDFC Bank merged with its parent company, Housing Development Finance Corporation Ltd, in July 2023, the lender’s net interest margin and cost-to-income ratio have not improved as expected. NIM remained unchanged at 3.4%, and cost efficiency at about 40% in the third quarter.
HDFC Bank’s current-account-savings-account (CASA) ratio fell to 34% in the latest Q3 from 38% a year earlier.
The management blamed a change in the operating environment, including tightened liquidity in the system, since the merger for the lack of improvement in the bank’s margins and efficiency ratios.
Based on the sum-of-the-parts valuation methodology where each business of an organization is valued separately, IIFL Securities has valued HDFC Bank’s subsidiaries at ₹230 per share. Excluding the value of subsidiaries, standalone HDFC Bank trades at two times FY26 estimated book value of the bank, according to the broking firm.
Considering that HDFC Bank has achieved 10% growth in its core profit for two successive quarters despite the challenges, the valuation is not expensive.
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