HDFC Bank's growth engine ready to roar into overdrive from 2025-26

After the merger, HDFC Bank has performed quite well, with an in-line performance in the July-September quarter (Q2) of 2024-25 (FY25). The private sector lender is planning to unlock value by listing its non-banking financial company subsidiary — HDB Financial Services.

 

The initial public offering (IPO) would raise Rs 12,500 crore (including an offer for sale of Rs 10,000 crore) in line with regulatory requirements. Currently, the bank holds a 94.64 per cent stake, and a valuation of Rs 67,000-70,000 crore is possible on listing.

 

HDFC Bank also plans to cut its loan-to-deposit ratio (LDR) to the pre-merger level of 85 per cent from the current 100 per cent by accelerating deposit growth. The bank expects to underperform loan growth rates for the banking sector in FY25, hit on-a-par growth in 2025-26, and outperform in 2026-27. It has reduced unsecured loan growth. Margins should recover in the long run due to a better portfolio mix and a lower share of borrowings (8-9 per cent of liabilities from the current 15-16 per cent).

 

HDFC Bank is focused on upgrading its entire tech stack internally, reducing dependence on vendors. Channels like chat banking through WhatsApp, SmartHub Vyapar for merchants, etc, are gaining traction. Employee attrition in the top six layers is in single digits, while attrition at lower levels may be offset by tech solutions.

 

Credit growth slowed to 7 per cent year-on-year (Y-o-Y) as the bank seeks to reduce its LDR from a peak of 114 per cent last year and 100 per cent in Q2FY25 to pre-merger levels (85 per cent). It has been shedding the corporate book and securitising retail loans (Rs 9,000 crore in Q2 and Rs 12,300 crore in December 2024), potentially leading to an 82-basis point (bp) LDR reduction. 

 

HDFC Bank has one of the lowest gross non-performing asset (NPA) ratios at 1.36 per cent. Management says the cascading effect of systemic stress could bring volatility to its retail portfolio. The provision coverage ratio has fallen to 70 per cent, with some erosion of the contingent provision buffer (now at 1.1 per cent of loans and Rs 34 per share). The proceeds from the IPO could shore up contingent provisions.

 

The Q2FY25 numbers were in line with expectations. The net interest income at Rs 30,114 crore (up 10 per cent Y-o-Y and 1 per cent quarter-on-quarter or Q-o-Q) was in line, with a stable net interest margin (NIM) of 3.5 per cent (marginally down 1 bps Q-o-Q).

 

Core fee income grew 17 per cent Y-o-Y and 16 per cent Q-o-Q. Treasury gains were Rs 290 crore (versus Rs 1,040 crore Y-o-Y and Rs 220 crore Q-o-Q). Other income (excluding trading gains) increased 12 per cent Y-o-Y, down 10 per cent Q-o-Q.

 

The pre-provision operating profit (PPoP) at Rs 24,706 crore (marginally higher) grew 9 per cent Y-o-Y and 3 per cent Q-o-Q. Core PPoP (excluding treasury gains) grew 13 per cent Q-o-Q. Total provisions declined 7 per cent Y-o-Y but increased 4 per cent Q-o-Q. Total credit cost stood at 44 bps (42 bps Q-o-Q).

 

HDFC Bank deployed Rs 700 crore in contingent provisions due to regulatory reasons. The profit after tax at Rs 16,821 crore was up 5 per cent Y-o-Y and up 4 per cent Q-o-Q.

 

Net advances grew 1 per cent Q-o-Q. Retail loans grew 3 per cent Q-o-Q, and mortgage loans grew 2 per cent Q-o-Q. Corporate loans declined 3 per cent Q-o-Q. Period-end deposit growth was strong at 5 per cent Q-o-Q, which resulted in a decrease in LDR to 99.8 per cent from 103.5 per cent Q-o-Q.

 

Current account savings account grew 2 per cent Q-o-Q, while gross NPA stood at 1.36 per cent (+3 bps QoQ) and net NPA stood at 0.41 per cent (+2bps Q-o-Q). The net slippages were Rs 4,200 crore versus Rs 4,400 crore Q-o-Q.

 

Management targets NIMs at 3.45-3.5 per cent and hopes to improve them by 20-25 bps in the medium term. The strong balance sheet and better asset quality give it defensive strength, with a return on assets just below 2 per cent and Common Equity Tier 1 at over 16 per cent. The monitorables include NIM and retail deposit trends.

 

The majority of analysts are bullish on the stock. According to Bloomberg, 14 of 15 analysts polled in December have an ‘outperform’/‘add’/‘buy’ rating, while one is ‘neutral’. Their average one-year target price is Rs 2,060.2 for the stock, which closed at Rs 1,797.65 on Tuesday on the BSE.