In its deepest plunge in three years, the HDFC Bank stock tanked over 6 percent on January 17, in a market disappointed by the flat margins posted by the country's largest private lender for the October-December quarter. But, it is challenging for HDFC Bank to deliver both on margins and costs, Suresh Ganapathy of Macquarie told Moneycontrol.
The net interest margins (NIM) of HDFC Bank for Q3FY24 stayed on a par with the previous quarter's 3.4 percent. "Markets are clearly not happy with that kind of outcome, they want margins to improve," Ganapathy said. In Q3FY23, before HDFC and HDFC Bank had merged, the bank's margins were 4.1 percent.
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"The market needs to understand that margin improvement will be a function of how good your deposit mobilisation is, how you are able to reprice on the assets front, move more towards retail deposits and within that towards higher-yielding retail to drive the margins," he explained.
Ever since the merger, HDFC Bank's asset book has grown tremendously but deposits haven't. The average quarterly net deposit growth for nine months of FY24 stood at Rs 63,600 crore, much lower than the guided Rs 1 lakh crore.
"Deposit growth for HDFC Bank is good, better than other players, but it does not match up to the needs of the merger. CASA deposits are going down, term deposits are going up, all that is affecting margins. Eventually you have to manage your ALM (asset and liability management) structure well," Ganapathy said.
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The CASA (current account, savings account) ratio was broadly flat sequentially at 37.7 percent for HDFC Bank in the quarter under review. CASA is a relatively cheap source of funds for banks. The higher the share of CASA in deposits, the lower is the cost of funds.
The management indicated that it aims to sustain a CASA mix of 39-40 percent over the next 18-24 months.
What will it take for the market to re-rate HDFC Bank?
"They have to deliver core PPoP (pre-provision operating profit) growth of 20-25 percent, which should reflect in the overall earnings growth. It is very clear that in the next 12 months, they should have a better margins than what it is today," Ganapathy said.
At the same time, he highlighted that HDFC Bank has to open more branches and manage costs. "So, ultimately, it's a pretty challenging outcome for them to deliver both on margins and cost, which is what the market wants 12 months down the line," he said.
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Ganapathy and his team expect HDFC Bank's margins to be 10 basis points higher than what they are today, one year down the line. He has an Outperform rating on the stock with a target price of Rs 2,075.
"A strong PPoP growth is required for the stock to get rated. If we look at the earnings growth for HDFC Bank this year, it has been 0 percent for FY 24 over FY23. Therefore, we'll have to look at how the EPS growth plays out over the course of next couple of years," he said.
At 1pm on January 17, the HDFC Bank stock was quoting Rs 1,558 on the NSE, down by 7 percent from previous close.
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