HDFC Bank, one of India’s largest private-sector banks, reported a 2.2% year-on-year increase in net profit for the December quarter (Q3FY25), totalling Rs 16,735.5 crore. Despite the modest profit growth, analysts have hailed the bank’s performance as “strong” given the challenging macroeconomic environment and the performance of its peers.
The bank’s share price rose by 1.2% on the Bombay Stock Exchange (BSE), touching an intraday high of Rs 1,685, outperforming the broader market. The BSE Sensex rose by just 0.17% during the same period, highlighting HDFC Bank’s robust performance in the sector.
Operational performance:
HDFC Bank’s net interest income (NII), a key indicator of profitability, showed a solid 7.7% growth year-on-year, reaching Rs 30,650 crore. However, the net interest margin (NIM), a measure of lending profitability, contracted slightly by 3 basis points quarter-on-quarter (Q-o-Q) to 3.43%. While the NIM was in line with analysts’ expectations, the dip in NIM raised some concerns about the bank’s ability to sustain its profitability margins in the near future.
Loan-to-deposit ratio (LDR) improvement:
A notable positive surprise in HDFC Bank’s Q3 results was the improvement in its loan-to-deposit ratio (LDR), which stood at 98% at the end of December, dipping below the 100% mark for the first time since its merger with HDFC Ltd. The LDR, a measure of the balance between loans and deposits, is significant as it provides insights into the bank’s liquidity and loan-disbursement capabilities.
The bank’s deposit growth was impressive, surging 15.8% year-on-year to Rs 25.6 trillion, compared to a 3% year-on-year increase in advances, which stood at Rs 25.4 trillion. The management noted that this deposit growth allowed the bank to reduce its LDR, positioning the bank favourably to extend loans when the macroeconomic environment becomes more conducive.
Outlook and analyst reactions:
Despite a slow credit growth outlook for FY25 due to the bank’s effort to realign its LDR to pre-merger levels, analysts have largely maintained their positive outlook on HDFC Bank’s stock. Nuvama Institutional Equities, which has a ‘Buy’ rating on the stock, noted that the bank’s Q3 performance was robust, citing the significant market share gain in deposits and consistent LDR improvements.
“We remain confident in the bank’s ability to continue to deliver growth as it progresses toward normalising its LDR, which is in line with its pre-merger levels. We are maintaining our ‘Buy’ rating and our target price of Rs 1,950 per share,” said analysts from Nuvama.
Systematix Institutional Equities has also raised its target price for HDFC Bank from Rs 1,945 to Rs 2,030, citing the bank’s progress on LDR and its capacity to manage credit growth in line with broader macroeconomic conditions. The brokerage firm revised its FY25 credit growth estimate to 3.5% year-on-year, down from its earlier projection of 7%, based on the current pace of asset sales and loan growth.
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Asset quality and slippage:
HDFC Bank’s asset quality showed signs of stress with an increase in the gross non-performing assets (GNPA) ratio to 1.42%, compared to 1.36% in Q2FY25. The net NPA ratio also rose to 0.46% from 0.41% in Q2FY25. However, excluding the agricultural portfolio, the GNPA ratio remained stable at 1.2%, signalling that the bank’s retail portfolio was relatively resilient. The bank’s slippage ratio, excluding agriculture, was the lowest among its private-sector peers, which is seen as a positive indicator of asset quality.
Although the slippage ratio increased 13% quarter-on-quarter, this was lower than the anticipated 15-20% increase, which indicates that the bank is managing its loan book effectively. Analysts at HSBC noted that the bank is approaching a consolidation phase in its loan growth and expects earnings growth to improve from Q3FY26 onwards as loan growth picks up.
Conclusion:
Overall, HDFC Bank’s Q3 results demonstrate resilience despite the challenging economic conditions and rising asset quality concerns. The bank’s strong deposit growth, solid NII, and improved LDR provide a strong foundation for future growth, though analysts suggest that the bank needs to maintain high deposit growth rates and manage its loan portfolio effectively to sustain its positive trajectory.
Given the bank’s operational strength and strategic positioning, analysts remain optimistic, with a majority maintaining ‘Buy’ ratings on the stock. However, a gradual improvement in the macroeconomic environment and further normalisation of the LDR will be key to unlocking the bank’s full potential in the coming quarters.
