HDFC Bank was among the few banking stocks which has never reacted much to its quarterly results in over half a decade, which earned it the reputation of ‘steady return generator’ for years. On Wednesday, when it plummeted 8.5 per cent reacting to its December FY24 quarter results, it was a moment of reflection of the new realities ahead of the bank.

HDFC Bank is at the cusp of readjusting to a new normal whether in terms of its business or the consequent implications to its financials. What’s more, this process of readjustment could be quite weighing for its investors. The bank has delivered just about five per cent returns to its investors in the last three years and the stock has fallen by over four per cent in the past year. It’s been a laggard ever since its merger with HDFC Limited was announced and going by Q3 results, there could be a few more tough quarters ahead.

While the management is quite upbeat on growth, it would be prudent to assume that the 20 per cent plus growth rate seen until recent years could be history for a while. The bank’s net interest income grew by 24 per cent year-on-year to ₹28,470 crore, though adjusted for HDFC Ltd’s base effect (₹4,840 crore of NII in Q3 FY23), the absolute growth came in at 2.8 per cent. Excluding the bump up from the home loans, the overall loan growth was rather uninspiring in Q3.

Segments show

Segments such as auto loans, credit cards and personal loans reckoned as the bank’s stronghold grew at sub-18 per cent rate, with the largest laggard being personal loans which grew at just about 10 per cent year-on-year; maybe the effect of RBI’s recent circular on risk-weights on unsecured loans. Even on corporate loans where HDFC Bank until recently was aggressive and priced at rates difficult to ignore, growth seems to have come off in Q3 with this book growing about 11 per cent year-on-year.

Overall, Q3’s performance may go down as one of the unusually tepid December quarters in many years considering that the quarter is supported by back-to-back festivals is considered a mood lifter for the banking industry. Normally, Q3’s momentum is maintained through March quarter.

Liabilities

But this time around, investors should brace themselves for a departure from the usual, given that the elephant in the room is the liabilities side of HDFC Bank’s balance sheet.

To be fair, the bank has indicated that its near-term focus would be a tad more on deposits. However, the pace of deposit accretion seems to be slowing. At ₹22,140 billion, total deposits grew about 28 per cent in Q3 year-on-year, though on a sequential basis it expanded just about two per cent, suggesting that the base effect is catching up faster than anticipated.

What’s more, it needs to be seen if the bank’s thought process that adding branches will help ring in the deposits is playing played out as expected. As against the initial plan of adding 1,500 branches in FY24, the bank has added only 264 branches from March 31, 2023, to December 31, 2023. Maintaining cost to income ratio at 40 per cent could be a tight rope walk for the bank.

Meanwhile, credit-deposit ratio which has shot up to over 110 per cent in Q3 (due to the merger effect) and falling liquidity coverage ratio (110 per cent in Q3 FY24 versus 121 per cent in Q2), seem to have sent out shrills to investors. CD ratio indicates how much of deposits a bank deploys into advances and LCR is a measure of high-quality liquid assets held by a bank.

Focus on deposits

Going ahead, the Street will have a hawk eye on the bank’s deposits garnering abilities as this will have a sharp impact on its profitability. Measured as net interest margin, profitability is already under pressure with NIM at 3.5 per cent in Q3. Although it’s significantly off the bank’s historical bandwidth of 4 – 4.2 per cent, skirting on tough terrains, HDFC Bank will have to weigh in on hiking in deposit rates to attract a larger flow and prioritising bulk deposits over retail deposits to meaningfully keep its deposit engine accelerated. Both options have downside risks to the bank’s financials.

What’s working for HDFC Bank are its pristine asset quality at 1.3 per cent gross non-performing assets ratio and undemanding valuations at 2.5x one-year forward price to book. But it would be interesting to see how long these positive handhold investors’ faith in the stock.

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