Analysts bullish on HDFC Bank’s long term growth despite weak show in Q2
Even as private sector major HDFC Bank on Monday reported a moderation in net interest margin (NIM) and higher bad loans for Q2FY24, analysts are bullish on the long-term prospects of the bank as they expect NIM and asset quality to recover from hereon, senior analysts say.
HDFC Bank had reported its first set of results on Monday after completing the long-awaited merger of erstwhile Housing Development Finance Corp (HDFC) with the bank on July 1.
The drag down of margin was mainly on account of higher cost of HDFC’s Rs 4.8-5 trillion of total borrowings and partially on account of implementation of the incremental cash reserve ratio (I-CRR) measure by the Reserve Bank.
According to Santanu Chakrabarti, India analyst of BFSI division at BNP Paribas, it will be difficult for HDFC Bank to achieve its 4-4.1% historical NIM trajectory in near term and the bank will likely recover NIM to 3.8% by the end of FY24.
Chakrabarti said when HDFC Bank was reporting 4.1% NIM, the low-cost current account and savings account (CASA) ratio at the bank was very different than current scenario. His comments assume importance as the share of CASA in HDFC Bank’s overall deposit base reduced to 38% during Q2 from 42% a quarter ago.
The trend is in-line with industry as more customers are parking money in fixed deposits instead of savings or current account to gain higher returns. HDFC Bank’s overall deposits grew about Rs 1.1 trillion during the reporting quarter to Rs 21.72 trillion as of September 30.
The HDFC entity was also a lower margin one, Chakrabarti says, and financing of that entire new group of assets along with maintaining adequate priority sector loans, CRR and statutory liquidity ratio (SLR) would mean that margins remain under pressure in near term.
However, it becomes pertinent to note that the cost to assets of the blended entity is much lower than what HDFC Bank earlier had.
“It is because at operating cost level, HDFC had a lower cost as it was a lean organisation with 4,000 employed or so. Thus, there is some benefit to that at the PPOP level,” he said.
According to another senior analyst at a large domestic brokerage, since the ICRR measure by the RBI has been relaxed and the fact that bank’s management has also said that additional liquidity will take about 2-3 quarters to either deploy or repay, during the next 2-3 quarters NIM could touch 3.6-3.65% level. “In long term, say 2 years, the focus on high yielding book and shifting of borrowings to deposits would result in further improvement of margins to 3.8-3.9%,” they said.
HDFC Bank’s asset quality also worsened during Q2, with gross and net non-performing asset (GNPA, NNPA) ratio rising to 1.34% and 0.35% as on September 30 from 1.23% and 0.33% a year ago.
Analysts say that asset quality from hereon is expected to remain broadly steady as individual home loan book of HDFC remains healthy while majority of stress has been recognised in the non-individual book of Rs 1 trillion.
“Asset quality ratios took a hit due to a 22 bps impact from HDFC’s non-retail portfolio. However, the bank has maintained healthy PCR (provision coverage ratio) at 74%. It also holds a 0.7% buffer of floating plus contingent provision, which provides comfort,” analysts at Motilal Oswal said, adding that HDFC Bank has made a good beginning post-merger and given a huge pace of capacity building, it believes there are levers in place to sustain this momentum in business growth. The bank’s overall advances rose 58% year-on-year to Rs 23.54 trillion as of September-end.