HDFC Bank reported a net profit of Rs 16,700 crore for Q3FY25, marking a 2% year-on-year (YoY) growth in line with muted expectations. The quarter was characterized by a strategic push to realign its balance sheet, resulting in subdued loan growth, higher deposit growth, and stable asset quality. Analysts at Elara Capital and BNP Paribas expect these adjustments to weigh on the bank’s near-term performance, with core earnings recovery still some distance away.
HDFC Bank’s loan growth decelerated to below 5% YoY, a sharp contrast to its historical performance. The slowdown is attributed to the bank’s deliberate efforts to lower its credit-deposit (CD) ratio, which now stands at 98.2%. This move aims to enhance balance sheet stability but has come at the cost of growth momentum.
Over the last two or three cycles spanning ten years, we’ve observed that customers eventually move back to CASA deposits as rate cycles normalise. This shift will help us maintain stable NIMs compared to the industry, as our duration and positioning are tightly managed, said Srinivasan Vaidyanathan, CFO of HDFC Bank, further discussing that steady deposit growth, retail loan opportunities, and asset quality provides comfort.
Meanwhile, deposit growth was robust, exceeding 15% YoY. While this reflects the bank’s strong ability to mobilize funds, it also poses challenges. The higher reliance on deposits has increased funding costs, contributing to a decline in net interest margins (NIMs).NIMs declined by 3 basis points (bps) sequentially to 3.62%, driven by rising deposit costs. Analysts note that HDFC Bank’s efforts to cut its loan-to-deposit ratio (LDR) further could exert additional pressure on NIMs, especially in the current liquidity environment. Moreover, any changes in the broader interest rate landscape could further strain margins.
The bank faces limited levers to offset margin pressures, given already low credit costs and the need to maintain investment momentum. This combination is likely to keep earnings under pressure in the near term.
Asset quality – A strong point
Asset quality remains a key differentiator for HDFC Bank. Slippages were contained at 1.4% for the quarter, with a slight increase driven by seasonal trends in the agricultural segment. The bank utilized Rs 300 crore in contingent provisions as it received cash recoveries from a wholesale account.
Provision coverage stood at 71% (excluding agriculture), with an additional buffer of 1% of total loans in the form of floating and contingent provisions. These measures underscore the bank’s ability to manage credit risks effectively, even in a challenging environment.
HDFC Bank’s ongoing balance sheet realignment reflects its efforts to strike a delicate balance between growth, NIMs, liquidity coverage ratio (LCR), and CD ratio management. Analysts highlight that this strategic shift, while necessary, may lead to prolonged periods of slower growth and earnings volatility.
The bank appears focused on preparing for the next growth cycle by optimizing its liquidity and funding profile. However, this transition is expected to impact profitability in the short term, as seen in the Q3 results.
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