HDFC Bank Q2 preview: Profits to grow while margins decline

HDFC Bank, India’s largest private bank, is expected to announce robust profits for the September quarter, attributed primarily to strong loan growth. This upcoming announcement will mark the first quarterly earnings report since the merger with its group company, HDFC. However, analysts anticipate a potential strain on the net interest margins (NIM) due to the merger and the additional Cash Reserve Ratio (CRR) stipulations imposed by the Reserve Bank of India (RBI).

The earnings report, scheduled for October 16, will shed light on the bank’s performance in the wake of these developments. Notably, last month, the broking firm Nomura revised its NIM forecast for HDFC Bank downward and downgraded the stock. According to Nomura, the NIM could face pressure over the coming two to three quarters, as the second-quarter opening book NIMs of HDFC Bank stood at 2 percent compared to 2.7 percent in the first quarter. This decline was primarily attributed to the surplus liquidity carried over post-merger.

Based on the average of five brokers’ estimates, HDFC Bank is expected to achieve a net profit of Rs 14,780 crore, representing a substantial 39.4 percent year-on-year (YoY) increase. Additionally, the bank’s Net Interest Income (NII) is projected to reach Rs 28,089.9 crore, reflecting a robust YoY growth of 33.6 percent. This remarkable performance can be attributed to the positive impacts of the merger with HDFC, leading to significant growth in deposits and loans.

In the bank’s Q2 business update, HDFC Bank reported a remarkable 29.9 percent YoY increase in deposits, reaching Rs 21,73,000 crore. Notably, the CASA (Current and Savings account) deposits observed a 7.6 percent YoY growth, amounting to Rs 8,17,500 crore, while the CASA ratio decreased to 37.6 percent from 45.4 percent in the previous year. Furthermore, the bank’s gross advances exhibited a notable surge of 57.7 percent, reaching Rs 23,54,500 crore.

However, the bank is also anticipating an increase in its gross Non-Performing Assets (NPA) to 1.4 percent during the quarter, signifying a 20 basis points (bps) rise from the preceding year. Moreover, the Net NPA is expected to witness a 10 bps increase, reaching 1.3 percent. These NPAs could be a cause for concern and may require effective management strategies to ensure sustainable growth and stability.

Nomura’s analysis highlights that they anticipate HDFC Bank to achieve a Return on Assets (RoA) of 1.6 percent in the second quarter. The projected decrease in the Net Interest Margins (NIMs) for the quarter, estimated to drop to 3.5 percent from 4.1 percent in the previous year, is expected to be influenced by liquidity reserve requirements and incremental Cash Reserve Ratio (ICRR) implications.

Furthermore, Nomura has expressed a keen interest in observing the trends within HDFC Bank’s RoA profile subsequent to the merger. They also intend to discern whether the impact on the bank’s Net Interest Margins is of a structural nature or a transitory one.

The projected decline in the Return on Assets, which is expected to decrease to 1.6 percent from the previous year’s 2 percent, is in line with the anticipated NIM reduction. These factors collectively suggest that HDFC Bank may face some short-term challenges due to the merger and regulatory requirements, necessitating careful management of liquidity and interest rate risk to maintain profitability and sustainable growth.

According to analysts, HDFC Bank faces several downside risks, including:

1. Non-recovery of the Net Interest Margin (NIM) or Return on Assets (RoA) as initially projected could lead to a de-rating of the stock. This scenario would widen the gap between the bank’s operating metrics and those of its closest competitors.

2. Continued lackluster performance in loan growth, which could pose a risk to the bank’s overall financial performance and market position.

3. The possibility of a more pronounced NIM impact than anticipated, particularly as a result of repo rate cuts in the forecasted fiscal year 2025. Such cuts could further exert pressure on the bank’s interest margins and affect its profitability.

Given these potential concerns, it’s important for HDFC Bank to address these issues effectively to maintain its market standing and financial performance.

The recent market performance indicates that in the last month, the Nifty Bank index has experienced negative returns of 3.51 percent. Correspondingly, HDFC Bank’s share price has also depreciated by 6.18 percent during the same period. This decline in share value suggests that market participants may be factoring in some of the aforementioned risks and concerns regarding the bank’s performance.