HDFC Bank Q2 Preview: Anticipated Profit Growth Amid Margin Contraction

HDFC Bank, India’s largest private bank, is gearing up to reveal its financial performance for the September quarter, marking the first earnings announcement post the merger with group company HDFC. Financial experts anticipate impressive profit figures in this report, fueled by substantial loan growth. However, there’s a shadow of concern looming over the bank’s net interest margins (NIM), partly due to the merger and the incremental Cash Reserve Ratio (CRR) guidelines issued by the Reserve Bank of India (RBI).

The bank is scheduled to unveil its results on October 16.

Last month, Nomura, a prominent brokerage firm, trimmed its NIM forecast for HDFC Bank and downgraded the stock. The NIM may come under pressure for the next two to three quarters as HDFC’s second-quarter opening book NIMs stood at 2 percent, down from 2.7 percent in the first quarter. The main culprit was the excess liquidity that lingered post-merger, as noted by Nomura. According to the average of estimates from five brokers, HDFC Bank is projected to post a net profit of Rs 14,780 crore, marking a 39.4 percent YoY increase. The bank’s Net Interest Income (NII) is poised to reach Rs 28,089.9 crore, reflecting a YoY boost of 33.6 percent. The merger with HDFC has bolstered the bank’s deposits and loans. In its Q2 business update, HDFC Bank reported a 29.9 percent YoY growth in deposits, reaching Rs 21,73,000 crore. Current and Savings Account (CASA) deposits increased by 7.6 percent YoY, totaling Rs 8,17,500 crore, although the CASA ratio dropped to 37.6 percent from 45.4 percent the previous year. Gross advances also surged by 57.7 percent to Rs 23,54,500 crore.

The bank’s gross Non-Performing Assets (NPA) are expected to rise to 1.4 percent in the quarter, marking a 20 basis points (bps) increase from the prior year, while Net NPA is projected to increase to 1.3, a 10 bps rise. “We expect the bank to deliver 1.6 percent Return on Assets (RoA) in Q2, with Q2 NIMs affected by liquidity reserve requirements and ICRR. We will monitor trends in its post-merger RoA profile, as well as assess whether the impact on its Net Interest Margins (NIMs) is structural or transient,” said Nomura.

NIM for the quarter is anticipated to dip to 3.5 percent from 4.1 percent the previous year. This is also expected to impact the Return on Assets (RoA), which is poised to decrease to 1.6 percent from 2 percent in the previous year.

Analysts point out several downside risks for HDFC Bank:

1. Failing to meet NIM/RoA expectations may result in the stock being devalued, as the gap in its operating metrics compared to the nearest competitor would widen.
2. Sluggish loan growth.
3. A sharper-than-anticipated NIM impact due to repo rate cuts in FY25e.

Over the past month, the Nifty Bank index has recorded negative returns of 3.51 percent. During the same period, HDFC Bank’s share price has decreased by 6.18 percent.