HDFC Bank Q3 Preview: Net profit expected to grow 14%, margins seen to be steady

HDFC Bank disappointed investors with its growth in low-cost current and savings account deposits for the quarter.

HDFC Bank is expected to report a 14 percent growth in net profit in the October-December quarter on the back of a 22 percent increase in net interest income, and steady margins.

The average of a poll of estimates of six brokerages shows that the private sector lender is expected to report a net profit of Rs 11,754 crore in the third quarter, and a net interest income (NII) of Rs 22,427 crore. The healthy NII growth is expected on the back of a robust 19.5 percent loan growth that the bank reported earlier this month in an early update of its business.

Analysts believe the lender’s loan growth is slightly disappointing given its historic performance. “HDFC Bank delivered weaker-than-expected q-q (quarter-on-quarter) growth in advances, despite strong growth of about 5 percent q-q in both retail and CRB (commercial and rural banking) segments. This was primarily due to a 1 percent q-q decline in the wholesale loan book (27 percent of total advances in 2QFY23),” pointed out analysts at BNP Paribas in a note.

Nevertheless, given the size of its loan book, the lender’s growth rate is still robust. Besides, HDFC Bank’s lending has been largely secure and to high-rated individuals and companies. Its risk-weighted assets are one of the lowest with respect to capital. Given this, the asset quality is expected to remain pristine for the bank. That said, some analysts warn that a potential increase in slippages may be anticipated from the agriculture segment or the unsecured loan book.

“HDFC Bank’s provisioning adequacy is heavily dependent on the fact that its stressed asset numbers are the very lowest in the sector. If this were to change for any reason, the provisioning burden on RoA (return on assets) will be high. However, such a change is very unlikely given the focus on prime assets,” the BNP Paribas report said.

The focus on high-rated loans may also weigh on its yield on advances. While that may translate into pressure on margins, the composition of the bank’s loan book may offset some of it, analysts said. HDFC Bank’s unsecured loan book and high-yielding commercial loans to small businesses has grown faster than other segments. Therefore, even though a large part of its book is fixed-rated, the lender has been able to transmit the increase in interest rates.

“The bank is chasing the best quality customers across product segments, which comes at a lower yield. This will be offset by growth led by high-yielding payment products, rural and commercial,” analysts at Prabhudas Lilladher wrote in a note. Those at Emkay Global Financial Services expect the net interest margin (NIM) to marginally improve to 4.3 percent in Q3FY23, from 4.1 percent a year ago.

For investors, guidance on loan growth and more importantly, on deposit growth, would be a key factor to watch for. HDFC Bank disappointed the Street with its growth in low-cost current and savings account deposits for the quarter. Further, management commentary on unsecured loans and credit costs would also be of interest. A big trigger for the bank’s stock, though, remains the conclusion of the mega-merger between the bank and parent HDFC Ltd.