India’s largest private bank, HDFC Bank, is set to report strong profits for the September quarter driven by strong loan growth. This will be the first quarterly earnings announcement since group company HDFC was merged into it. Analysts are expecting some pressure on net interest margins (NIM) because of the merger as well as the incremental Cash Reserve ratio (ICRR) stipulations of the RBI.
The bank is set to announce its results on October 16.
Last month, broking firm Nomura had trimmed its NIM forecast for HDFC Bank while downgrading the stock. NIM could see pressure over the next two to three quarters as HDFC’s second quarter opening book NIMs were at 2 percent versus 2.7 percent in Q1. This was mainly on account of excess liquidity being carried post-merger, Nomura said.
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According to the average of five brokers’ estimates, HDFC Bank is expected to register a net profit of Rs 14,780 crore rising by 39.4 percent year-on-year (YoY). The bank’s Net Interest Income (NII) is set to touch Rs 28,089.9 crore, a YoY increase of 33.6 percent.
The bank’s merger with HDFC has resulted in strong deposits and loans. In its Q2 business update, HDFC Bank said its deposits grew 29.9 percent YoY to Rs 21,73,000 crore. Its CASA (Current and Savings account) deposits have gone up 7.6 percent YoY to Rs 8,17,500 crore, while CASA ratio has reduced to 37.6 percent from 45.4 percent in the previous year. Its gross advances also grew 57.7 percent to Rs 23,54,500 crore.
The bank’s gross Non Performing Assets (NPA) are set to increase to 1.4 percent in the quarter, an increase of 20 basis points (bps) from the previous year, with Net NPA expected to rise to 1.3, a 10 bps hike.
Analysts focus on margins
“We expect the bank to deliver 1.6 percent RoA in Q2, with Q2 NIMs impacted by liquidity reserve requirements and ICRR. We will watch out for trends in its post-merger RoA profile, as well as how much of the impact on its Net Interest Margins (NIM)s are structural vs transient.” said Nomura.
NIM for the quarter is expected to come down to 3.5 percent from 4.1 percent in the previous year. This is also set to affect Return on Asset (RoA) which is expected to decline to 1.6 percent from 2 percent from the previous year.
The downside risks for HDFC Bank, according to analysts, are:
1) Non recovery of the NIM /RoA as estimated, would get the stock to be de-rated as the gap of its operating metrics to the nearest competitor would expand.
2) Loan growth remaining lacklustre
3) Sharper than estimated NIM impact due to repo cuts in FY25e.
In the last month, the Nifty Bank index has given negative returns of 3.51 percent. HDFC Bank’s share price in the same period has lost value by 6.18 percent.
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