The September quarter (Q2FY24) was one of transition for HDFC Bank after it merged with HDFC with effect from 1 July. This has had a bearing on some key metrics during the quarter. For instance, HDFC Bank’s net interest margin (NIM) on total assets in Q2 came in at 3.4%, below expectations. NIM would have been higher by 25 basis points (bps), or 0.25 percentage point, if the bank had not kept the surplus liquidity buffer to manage the merger. Plus, there was a drag from maintaining the incremental cash reserve ratio (ICRR).
The good news is that scheduled banks are not required to maintain ICRR now. Thus, Q3 would not see an adverse impact owing to this. Also, HDFC Bank is hopeful of a rebound in NIM going ahead, led by the rising share of retail in the product mix and normalizing liquidity buffers. Analysts believe NIM has bottomed out. Having said that, the pace of recovery is likely to be gradual at best.
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“While the bank is carrying excess liquidity, it is still raising large fresh deposits and securitizing loans. We expect these to normalize over the next two-three quarters with an uptick in loan growth and normalization of liquidity,” said analysts at Jefferies India in a report on 16 October. In Q2, HDFC Bank’s loan book was up by nearly 5% sequentially on a like-to-like basis.
Meanwhile, HDFC Bank’s asset quality is healthy with gross and net non-performing assets at 1.34% and 0.35% of loans as on 30 September. But these metrics have deteriorated, albeit slightly compared to pre-merger levels (Q1FY24) by 17 bps and 5 bps, respectively. This is because of some restructured accounts in HDFC that have been classified as non-performing assets according to the extant guidelines.
Shares of HDFC Bank are up by 7% in the last one year. An upward margin trajectory could lead to a re-rating of the stock. BNP Paribas Securities India believes that HDFC Bank’s valuations at 2.3 times Q1FY25 core book value per share is attractive as it is at a 30-40% discount to its pre-merger five-year mean. For perspective, estimated FY26 core return on equity of 17.1% compares favourably with pre-merger five-year history, said BNP.
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Updated: 18 Oct 2023, 12:32 AM IST