HDFC Bank Q3: Slower loan book growth, high credit costs likely to impact margins; 5 key things to watch out for

The earnings are expected to be muted as margins are likely to contract due to high credit costs and unfavourable LDR (Loan-to-deposit ratio).

Sluggish credit growth

In its Q3FY25 business updates, HDFC Bank showed marginal credit growth at 3% YoY, which is expected to weigh on the interest income for the quarter. In addition, the bleak macroeconomic scenario and fall in overall credit growth in the country are expected to impact the earnings of the country’s largest private lender.

Sharp rise in deposits

The bank struggled to improve its LDR post-merger with erstwhile HDFC Ltd. The LDR ratio came in near 100 for Q3FY25 as the total deposits for the bank stood at ₹25.6 lakh crore as against the advances at ₹26.5 lakh crore.

The total deposits saw a sharp 16% jump in the Q3FY25 business updates, indicating the bank’s intention to bring the LDR ratio below 100 to control credit costs.

Muted NII growth

The bank's net interest income is expected to grow in the low single digits, largely due to muted loan growth. Additionally, the margins are expected to remain under pressure due to higher credit costs as it struggles to bring the LDR below 100 in the comfortable range.

Asset quality

The retail and small finance category has seen a sharp deterioration across all major banks, as per the latest earnings update. In addition, the post-merger challenge still persists for HDFC Bank, adding some pain to the asset quality for the quarter.

Subdued profit growth

Soft loan book growth, higher credit costs and some pain in asset quality are expected to put a single-digit growth in net profits for the bank in Q3FY25. The deterioration in the asset quality is expected to add provisions for bad loans, there by bringing the overall net profit growth to low single digits. Investing.com consensus estimates suggest the net profit to remain flat at ₹16,800 crore for Q3FY25.

Glance of Q2FY25

HDFC Bank reported a broadly muted set of numbers, with net interest income growing by 10% YoY to ₹30,113 crore as against ₹27,300 crore in the previous year's similar quarter. Sequentially, the net interest income remained largely unchanged.

The standalone net profit for the bank stood at ₹16,800 crore, growing 5.5% YoY from ₹15,976 crore in Q2FY24. This was largely due to 7% drop in provisions at ₹2,700 crore.

Shares of HDFC Bank gave 2.5% returns in the October to December quarter and 3.8% in 2024, outperforming its benchmark NIFTY Bank index.