HDFC Bank sheds 6% to top Nifty losers as flat margins, lower EPS growth upset investors

A key miss in margins comes despite rise in cost-to-deposit ratio, receding impact of incremental cash reserve ratio (ICRR), and deployment of excess liquidity, said analysts

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The HDFC Bank stock plunged over 6 percent on January 17 to be the top loser on the NSE Nifty 50 after the lender’s high provisions towards alternative investment funds (AIFs) limited profit growth to 2.5 percent on-quarter in the October-December period (Q3) of FY24.

Around 4 percent sequential fall in growth of earnings per share (EPS) and flat margins made investors disappointed after the lender announced its Q3 financials, said analysts.

In the past one year, the stock of the country’s largest private sector lender gained over 5 percent, underperforming Bank Nifty index that soared over 13 percent.

HDFC Bank’s first EPS decline in a decade has summed up for a disappointing quarter, said analysts at Bernstein. “HDFC Bank’s decline in EPS is famed for its consistent mid-teens EPS growth. The bank had to once again use lower tax expense route to maintain 2 percent return on asset (RoA),” they pointed out, sharing an ‘outperform’ rating with a target price of Rs 2,200 per share.

Analysts at Jefferies gave a ‘buy’ rating to the HDFC Bank stock after the Q3 results, with a target price of Rs 2,000, implying an upside of 19 percent from the last close of Rs 1,678. “HDFC Bank’s net profit was ahead of our estimates. The lender’s asset quality was stable, CASA growth was better than peers, and cross-sell will remain in focus,” they underlined in a post-result review analysis.

Those at Morgan Stanley, too, remained bullish on the counter as they shared an ‘overweight’ rating with a target price of Rs 2,110 per share. “HDFC Bank’s Q3 profit-after-tax (PAT) grew by 2 percent quarter-on-quarter (QoQ), beating estimates by 4 percent owing to lower taxes. NII was also ahead of our estimates,” they highlighted in a post-result rationale.

HDFC Bank’s net interest income (NII) grew 4 percent on-quarter, led by a 4.9 percent sequential growth in gross advances, while its net profit was up 2.5 percent on-quarter supported by bulky treasury gains and favourable tax write-backs of Rs 1,500 crore. The lender’s EPS fell by 4 percent QoQ to Rs 22 from Rs 21.1.

Also read: Bank Nifty plunges 1,500 points down on HDFC Q3 results; traders watching 46,500 support

Q3 margins flat but management hopes it to bottom out

Higher cost of funds or borrowing costs limited any expansion in net interest margins (NIMs) for the banking giant, keeping them flat sequentially at 3.6 percent in Q3FY24. The lender’s cost of funds rose 10 basis points (bps) to 4.9 percent from 4.8 percent on-quarter.

A key miss in margins comes despite a rise in cost-to-deposit ratio, receding the impact of incremental cash reserve ratio (ICRR), and the bank’s deployment of excess liquidity, said analysts.

Against this, analysts at HSBC shared a ‘buy’ call for HDFC Bank but reduced the target price to Rs 1,950 per share from Rs 2,080 apiece, saying that they see few levers for NIM expansion. “We moderate NIM expansion to 15 bps over FY24-26 versus 30 bps earlier. We expect near-term earnings to remain under pressure and cut earnings per share (EPS) by 0.8 percent/7.8 percent/5.8 percent for FY24/25/26,” the brokerage firm said.

The management believes that the bank is at the lower end of margin contraction spectrum and expects recovery to 3.7 percent in 18-24 months.

That being said, analysts at Motilal Oswal expect that the bank’s NIM recovery as highlighted by the management and improvement in operating leverage would enable HDFC Bank to deliver healthy return ratios. “We estimate HDFC Bank to deliver FY26 RoA/RoE of 1.9/16.7 percent,” the brokerage firm said, reiterating a ‘buy’ call with a target price of Rs 1,950 apiece.

Also read: HDFC Bank plans to increase branches to 13,000 in next 3-5 years, says CFO

Asset quality steady but provisions on the rise 

On the asset quality front, gross non-performing assets (GNPAs) were steady at 1.3 percent in the quarter ended in December, whereas net NPAs were stable at 0.3 percent, supported by healthy recoveries and accelerated write-offs.

But, the lender’s provisions or a percentage of funds that banks set aside to protect themselves from potential losses if NPAs increase at a faster pace jumped by 39 percent QoQ in Q3FY24.

Analysts at DAM Capital explained that the rise in provisions was on the back of a Rs 1,220-crore special provision pertaining to alternative investment fund (AIF) drawdown. “The headwinds are still higher before the path gets smoother but valuations are favourable,” they wrote in a note, sharing a ‘buy’ rating with a target price of Rs 2,000 per share.

The Reserve Bank of India has recently imposed restriction on banks from utilising the AIF route to ‘evergreen’ their loans. Evergreening refers to a practice where financial institutions extend new credit to cover old debts, essentially masking the true status of those loans.

Loan growth to stay on a strong footing

On the operational front, HDFC Bank saw strong credit growth of 4.9 percent QoQ, led by retail and commercial and rural banking, but deposit growth was a laggard at 1.9 percent.

“We believe that the deposit growth is manageable at a price. The trend in the deposit growth was weak during the quarter as the management avoided wholesale deposits due to their volatile nature and pricing issues. But, credit growth is expected to remain strong going ahead as well due to improved penetration,” said analysts at InCred, sharing an ‘add’ rating and setting the target price at Rs 2,000 per share.

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