HDFC Bank Q4 preview: Focus on deposits to keep margins steady but income growth may drag

HDFC Bank may have to contend with a low single-digit revenue growth in Q4 FY24, given India’s largest private lender focuses on mobilising deposits to keep margins steady rather than growing advances.

HDFC Bank’s January-March net interest income is expected to grow by 1.8 percent quarter-on-quarter to Rs 29,172 crore, according to the median estimate of eight brokerages polled by Moneycontrol.

However, the bank’s operating income, measured by operating profit before provisions, is likely to see a healthy growth of 22.4 percent on a quarterly basis to Rs 28,925 crore, primarily helped by treasury gains and the sale of a stake in HDFC Credila, the lender's education loans wing.

The slow advance growth, low loan to deposit ratio and continued pressure on net interest margins will likely weigh on HDFC Bank’s net profit for the three months to March, limiting the quarter-on-quarter gain to a modest 3.1 percent to Rs 16,577 crore, according to the consensus estimate.

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On the other hand, a few brokerages note that the exceptional gain from selling a majority shareholding in Credila may bolster the bank’s net profit. HDFC Bank’s year-on-year financial results are not comparable due to the merger with the parent entity Housing Development Finance Corporation during the year.

HDFC Bank stock is down nearly 10% so far this year since January, after the sharp fall post the previous quarter results. The bank's Q3 earnings had disappointed investors with compression in net interest margins, and challenges becoming apparent in growing the loan book.

Strategic shift to mobilising deposits 

According to Axis Securities, HDFC Bank has intentionally slowed its advances growth to prioritise improving its deposit base, which has seen an improvement sequentially. This would presumably stabilise the bank's margins.

Further, a healthy pre-provision operating profit growth will be helped by a stable operational expense ratio and contributions from non-interest income, particularly from the stake sale in subsidiary Credila.

Prabhudas Lilladher analysts noted that HDFC Bank's loan growth is expected to be modest at 1.6 percent quarter-over-quarter, led primarily by its retail and commercial and rural banking (CRB) portfolios. However, the brokerage anticipates a 12 basis point decline in net interest margin due to a sharp fall in the loan-to-deposit ratio.

One-time gains and asset quality to provide support

Emkay Research and ICICI Securities both highlight the positive impact of one-off gains from the Credila stake sale. These gains, along with some reversal of provisions from alternate investment funds (AIFs), are expected to significantly enhance the bank's profitability.

Furthermore, Dolat Capital suggests that these factors, combined with an expected stable net interest margin of about 3.4 percent, will contribute positively to the bank's bottom line.

Asset quality is anticipated to remain robust, with the gross non-performing asset ratio holding steady at 1.25 percent. Provisions are likely to see a moderation, benefiting from likely write-backs in AIF provisions, adding another layer of support to earnings.

Sector-wide challenges remain, some may weigh

The banking sector overall, as noted by Elara Capital and JM Financial, faces headwinds that include margin pressure due to tight liquidity and continuous deposit pressure. Despite these challenges, the sector may look forward to lower credit costs and improved recovery trends soon in the upcoming quarters.

Kotak Securities said that HDFC Bank's focus on deposits, which are expected to grow about 7 percent quarter-on-quarter, aligns with strategies to have a cushion against these pressures.

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