HDFC Bank Q3 Preview: Steady Earnings Expected Amidst Lower LDR and Better NIMs
Steady Earnings Predicted
HDFC Bank Ltd. is expected to report steady earnings for the December quarter, characterized by a lower loan-to-deposit ratio (LDR), moderate loan growth, and stable asset quality and margins, according to various brokerages. Motilal Oswal Financial Services Ltd. noted that HDFC Bank is positioned to deliver steady growth and profitability, supported by strategic liability management, margin recovery, and a strong focus on asset quality.
Deposit Growth Expected to Outpace Credit Growth
Brokerages anticipate that HDFC Bank's deposit growth will surpass its credit growth in the October-December period, leading to a slight improvement in the loan-to-deposit ratio. IDBI Capital predicts a muted Net Interest Income (NII) growth of 7% due to slower loan growth, and a 2% year-on-year (YoY) increase in Profit After Tax (PAT). They also estimate a 3% YoY growth in advances and 16% YoY deposit growth, leading to the LDR falling below 100% to 99.2% in the quarter.
Stable Margins Expected
While HDFC Bank's credit growth is below the industry average, Axis Securities suggests that margins are likely to remain stable sequentially, with a slight positive bias. This comes as HDFC Bank has been navigating post-merger challenges, including high CD ratios and inherited high-cost borrowings, with a strategic emphasis on deposit mobilization and balance sheet optimization. However, Emkay Global Financial Services cautioned that slower credit growth and elevated operating expenses (opex) could keep earnings in check.
Focus on Net Interest Margins
Kotak Institutional Equities highlights that the focus remains on the progress of Net Interest Margins (NIMs), which are expected to be positive in the medium term. Prabhudas Lilladher Pvt. expects the bank's NIMs to remain steady at 3.58%, as a decline in yields will likely be offset by a decline in the cost of funds. Motilal Oswal also believes that margins are stabilizing, with NIM improving to 3.46% in the July-September quarter and expects the bank's NIMs at 3.6% by fiscal year 2026-27. Nomura Research, however, anticipates some moderation in NIMs due to a decline in the CD ratio, weak current and savings account (CASA) balances, and higher growth in corporate loans. The brokerage also noted that profit after tax growth could be lower due to higher taxes.
Asset Quality and Provisions
Analysts expect asset quality to remain stable, with slippages under control for the bank in the third quarter. The robust provision buffer of ₹26,200 crore offers comfort against potential credit risks. Prabhudas Lilladher, however, projects provisions to increase by 25% due to aging, increased slippages, and prudent accounting practices. They also suggest that gross bad loans could worsen by 7 basis points sequentially due to increased slippages.
Operational Efficiency
Overall, operating efficiency is expected to improve, with stable cost ratios despite continued investments. However, pre-provision operating profit could decrease during the quarter due to higher operational expenses and lower other income. The management’s commentary on deposit accretion, credit growth, and the outlook on margins will be keenly monitored, along with any commentary on the unsecured loan portfolio and asset quality.
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