HDFC Bank stock: Low loan-deposit ratio key for outperformance, say experts

HDFC Bank share price outlook: analysts see HDFC Bank's LDR, which is the highest amongst peers, to fall below the level in about two years

Brokerages on HDFC Bank after Q1FY25 results: With HDFC Bank posting in-line quarterly results for the June quarter of financial year 2024-25 (Q1 FY25), analysts say ease in the lender's loan-to-deposit ratio (LDR) will decide the stock's trajectory ahead.

HDFC Bank's LDR, which moved past the 100-per cent mark after its mega merger with erstwhile HDFC Ltd, has been keeping investors on the sidelines as a high ratio suggests the bank may not be able to cover loan losses and huge withdrawals by its customers in case of any unforeseen emergencies.

 

Broadly, analysts see HDFC Bank's LDR, which is the highest amongst peers, to fall below the level in about two years. This has also led to analysts trimming their loan growth forecast for the bank for the period.

"We believe course correction of the balance sheet will continue for the next 6-7 quarters till LDR falls to below 100 per cent from 105 per cent. We have cut deposit growth to 15 per cent from 16.5 per cent earlier and take loan growth down to 10 per cent over FY25 and FY26," said analysts at Nuvama Institutional Equities led by Mahrukh Adajania.

In the April-June quarter of FY25, HDFC Bank's loan growth declined 0.9 per cent quarter-on-quarter (Q-o-Q) to Rs 24.63 trillion, led by 5 per cent Q-o-Q dip in corporate and wholesale books.

Deposit growth was flat, while the current account-saving account (CASA) ratio declined 200bp Q-o-Q to 36 per cent. LDR stood at 103.5 per cent at the end of the quarter with the bank stating that its key focus will be on bringing its LDR down, while focusing on profitability.

On his part, HDFC Bank Chief Executive Officer (CEO) Sashidhar Jagdishan acknowledged that deposit growth in Q1FY25 was short of expectation. The miss, he said, was on account of lower fresh flows into current accounts (CA). While attrition of some Q4 CA was anticipated, fresh flows were weaker-than-expected leading to overall CA decline being sharper than expected.

This, combined with the run-down of Rs 16,000 crore of non-retail deposits of e-HDFC led to the tepid period-end balances.

"The regulator (Reserve Bank of India) has not spelled out a specific number on the LDR. Furthermore, even internally, the bank does not have a specific number. However, considering the risk in the system, it would be in the interest of the bank to lower the LDR in an accelerated manner," Jagdishan added.

"Reduction in LDR continues to be the focal point of HDFC Bank's strategy and is likely to guide overall direction for the bank. In our view, continued systemic challenges in deposits are likely to result in slower loan growth for HDFC Bank in the near-term," said  Sameer Bhise, managing director and co-head of research at JM Financial.

His brokerage builds 12.7 per cent CAGR over FY24-26E in loan growth, and expects LDR to drop below 100 per cent by March, 2026.

Similarly, ICICI Securities forecasts an LDR of 100 per cent for FY25 and 95 per cent for FY26 for HDFC Bank.

"We estimate HDFC Bank to deliver around 18 per cent CAGR in deposits for FY24-26 (absolute rise of Rs 4-5 trillion per year). We, however, estimate overall loan growth of 12 per cent CAGR over the same period as it focuses on more balanced LDR and borrowing substitution," the brokerage said.

HDFC Bank stock rating

That said, while most brokerages have maintained their 'buy' ratings on HDFC Bank stock, given its long-term growth potential and inexpensive multiples compared to its history, analysts believe moving back to higher multiples looks difficult.

"Higher multiples would require a higher growth and superior profitability ratios, which is still some time away. It is likely to be a slow path of recovery in multiples and outperformance for HDFC Bank stock," said analysts at Kotak Institutional Equities.

On the bourses, HDFC Bank share price advanced 2.7 per cent to Rs 1,650.7 per share on the BSE in the intraday trade on Monday. By comparison, the BSE Sensex was up 32 points at 11:14 AM.