HDFC Bank stock loses grip as Q3 margin disappoints
A continued dull show on the margin front in the December quarter (Q3FY24) caught HDFC Bank Ltd’s investors off-guard. Remember, Q2’s muted margin was understandable as the quarter was the first one post the merger with HDFC Ltd. Thus, when the bank clocked net interest margin (NIM) on total assets of 3.4% in Q3, flat sequentially, investors punished the stock, taking it down by nearly 7% on Wednesday.
This is on a day when the benchmark Nifty 50 index was down 1.8%. The subdued margin comes even though the requirement of maintaining incremental cash reserve ratio (ICRR) was not there at all in Q3. In Q2, there was an impact on NIM from maintaining ICRR.
Moreover, the fall in liquidity coverage ratio to 110% from 121% in Q2 has not helped Q3 NIM. Collectively, higher funding costs and slower pace of growth in retail loans took a toll on margin. The management expects NIM to recover going ahead and this would primarily be driven by an uptick in retail loan growth and ramp up in the current account savings account (CASA) ratio.
“In our view, NIMs in the earlier part of the (policy rate) cycle will be driven more by yield pick-up, i.e., a rise in yield on loans, and during the later part will be driven more by replacement of high-cost liabilities acquired from erstwhile HDFC Ltd," said analysts at Macquarie Capital Securities (India) in a report on 16 January. The broking firm notes that replacement of high-cost borrowings of erstwhile HDFC Ltd with deposits will be a long-drawn process. In fact, HDFC Bank’s deposits grew by a mere 1.9% sequentially in Q3 lagging the 4.9% increase in loans.
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