HDFC Bank: Analysts see deposits outpacing loan growth; margin to recover gradually

New Delhi, Apr 22
HDFC Bank reported fairly strong quarterly results over the weekend, but shares of the country’s largest private sector lender declined over 1 per cent on Monday afternoon. This even as the broader BSE Sensex was up 0.5 per cent.
Effective July 1, 2023, HDFC Bank completed the merger of its parent HDFC Limited, which was the country’s largest mortgage lender, with itself. The merger had been first announced on April 4, 2022. Over the past two years, the lender’s shares have been a laggard on the Dalal Street. As of Friday’s close, the stock was down 4.7 per cent, when compared with its stock price on April 5, 2022. In the same period, the BSE Bankex has gained near 22 per cent and the Sensex is up over 20 per cent.
With the merger clearly in the rearview as it now looks ahead to the future, how do analysts view HDFC Bank?
In the January-March quarter, the lender reported a standalone net profit of Rs 16,511.85 crore, up 37 per cent from a year ago profit of Rs 12,047.45 crore. Net interest income for the fourth quarter rose 24.5 per cent to Rs 29,080 crore.
Accounting for the loans that came in after the merger of HDFC Limited, HDFC Bank saw a loan growth of more than 17 per cent on a normalised basis, while deposits grew 18.4 per cent on a normalised basis for FY24. Across the banking sector, loan growth, led by retail loans, has been strong, while deposit growth has lagged.
Param Subramanian of Nomura pointed out that the loan-to-deposit ratio came down sharply to 104 per cent, compared with 110 per cent in the third quarter, as deposits outpaced loans significantly in a seasonally strong fourth quarter. He added that the bank’s management had categorically called out that it would be prioritising profits over growth, which was reflected in the slight uptick in its net interest margins.
This, said Subramanian, set the stage for continued moderation in the loan-to-deposit ratio. He sees loans at HDFC Bank growing at 12-13 per cent over financial years 2025-26, while deposits are expected to grow at 17 per cent compounded annual growth over 2024-26.
Subramanian said this was in the right direction, but the process was going to be “very gradual.” Net interest margin is also expected to only improve gradually.
“We expect HDFC Bank to deliver 14-15 per cent return on equity over FY2025-26, which coupled with softer loan growth versus peers, does not make upside compelling,” he said, cutting earnings per share estimates on the lender by 3 per cent for 2025-26.
Manish Agarwalla, research analyst at Phillip Capital, opined that the bank was “well poised” to gain market share in the long run, but loan growth could be moderate in the intermittent period.
“As the merger benefits accrue over a period, the intermittent period will see focus on balance sheet management leading to moderate growth,” he noted.
Dnyanada Vaidya, research analyst at Axis Securities, also expects HDFC Bank’s loan-to-deposit ratio to improve over the medium-term, with deposit growth likely to outpace credit growth.
“While the bank witnessed improved deposit growth as it exited FY24, credit growth was slower as focus shifted towards deposit accretion. Here on, continued momentum on deposit mobilisation and improvement in trajectory of net interest margins/ return on assets would be key re-rating levers for the stock,” said Vaidya.
The Axis analyst has also trimmed HDFC Bank’s net interest income and earnings estimates by 3-4 per cent and 4-5 per cent respectively, to factor in lower credit growth and a slower-than-expected margin recovery.
HDFC Bank’s balance sheet realignment “remains an arduous task,” said Sameer Bhise, research analyst at JM Financial Institutional Securities. But, it remains capable of delivering strong deposit growth even in a difficult environment, while also delivering healthy growth at scale, he added, pointing that valuations were also attractive.
“HDFC Bank’s core performance is gradually on the mend, with improving deposit growth even as net interest margins remained steady. We believe HDFC Bank remains well-placed to navigate the difficult deposit environment. The second half of FY25 should see meaningful improvement in core performance and should drive valuation re-rating for HDFC Bank,” Bhise said.