HDFC Bank came up with results for the quarter ended September 2024 on Saturday. The numbers were accompanied by an update that the board has approved the IPO of the subsidiary HDB Financial Services. It will be an OFS (offer for sale) of ₹10,000 crore plus a fresh issue of ₹2,500 crore. As per RBI’s mandate, the NBFC must be listed by September 2025.

Loan-deposit ratio

The bank reported a steady and in-line set of numbers. To address the elephant in the room first, the banks’ LDR (loan to deposits ratio) has improved to 100.8 per cent from 104.5 per cent as of the quarter ended June 2024. This was aided by securitisation and calibrated loan growth, apart from strong deposit growth. The loan book grew at 7 per cent year on year, while the deposits grew at a faster 15 per cent. The bank has gained market share in deposits as the system growth rate for the quarter came in at a lower 11 per cent.

Currently the industry is witnessing higher growth in advances than the growth in deposits. The management expects this to reverse and advances growth to be at par with that of deposits in two to three years. In this timeframe, it expects the LDR to fall to pre-merger levels of high eighties. The management has charted out a glide path for loan growth in this regard. It expects loan growth of the bank to be sub-industry growth in FY25, at par with industry growth in FY26 and to transcend industry growth in FY27.

Resilient NIM

During the quarter gone by, term deposits grew much quicker than CASA (current account savings account) balances – 19.3 per cent year on year vis-à-vis 8 per cent. CASA ratio declined to 35.3 per cent from 36.3 per cent as of the preceding quarter. The cost of funds stood at 4.9 per cent unchanged from that of Q1 FY25 and the yield on assets stood at 8.3 per cent with a minor cut of 10 bps sequentially.

To keep up the momentum in deposits, the bank wishes to cushion itself with a higher magnitude of high-quality liquid assets. Hence the LCR (liquidity coverage ratio) during the quarter moved up 500 bps to 128 per cent from Q1 FY25.

Despite such factors, NIM (net interest margin) was rock solid and unchanged quarter on quarter at 3.5 per cent. Come rate cuts, though NIM might be volatile quarter on quarter, in the long run it will stabilise, as LCR will also normalise by then, reckon the management.

Net profit growth year on year is just 5.3 per cent optically. However, this is due to a change in accounting for treasury gains, effective only from the current financial year. The change in accounting entails treasury gains to be taken to reserves directly and not through the statement of profit and loss. Thus, such treasury gains would not be part of the net profit for Q2 FY25, unlike Q2 FY24. So, Q2 FY24’s profit adjusted for this impact, the profit growth for Q2 FY25 is 17 per cent.

Asset quality

The Gross NPA ratio declined marginally 3 bps to 1.36 per cent. Slippages remained flat sequentially. This needs to be viewed in the context of peers such as Kotak Mahindra Bank reporting stress in pockets such as unsecured books. The calibrated approach to loan growth induced by the elevated LDR, puts the bank in a unique position to pick and choose loan applications, prioritising quality and pricing over raw growth. This is conducive to the bank’s prospects in the long term.

We maintain the ‘accumulate’ call on the stock given in bl.portfolio edition dated July 28, 2024.

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