Margin pressure continues
Sector Outlook: Positive
In Q4FY24, HDFC Bank’s Net Interest Income was Rs. 29,077 crores, showing a 24.5% increase from last year but slightly missing the expected Rs. 29,172 crores. Pre-provision operating profit rose to Rs. 29,274 crores, which is better than expected, showing a significant year-over-year increase of 57.2%. However, provisions for potential losses jumped to Rs. 13,511 crores, mainly due to a large reserve set aside as a precaution, boosting the bank’s financial safety. Without this reserve, provisions would have been much lower. The bank’s net profit matched expectations at Rs. 16,512 crores.
The bank’s core profit margin from interest was 3.44%, and bad loans were relatively stable, with slight increases in non-performing assets. The bank remains well-capitalised with an 18.8% capital adequacy ratio. Deposits and loans both grew significantly, indicating robust business activity. The bank’s subsidiaries in life insurance and non-banking financial sectors also reported growth, except for the general insurance arm, which faced a loss this quarter.
Key Concall Highlights
- HDFC Bank is focusing more on making profits rather than just growing bigger. They believe that the returns on assets they’ve seen before are a good sign for future profits.
- This quarter, the bank saw a lot of deposit money come in, some of which was temporary. Even without these temporary boosts, people are still depositing money steadily. The bank has stopped competing on deposit rates since the third quarter of the financial year 2024 because they don’t think it’s a long-lasting strategy. Instead, they’re working on making customer service better to attract more deposits.
- The bank is also working on keeping its savings up and paying off old debts from HDFC, which will slow down its loan-to-deposit growth for a while.
- HDFC Bank has met its lending goals to important sectors like agriculture and small businesses, but it’s been tough to reach the smaller farmers and less wealthy people. They plan to use non-traditional methods to meet these goals, having already surpassed the required 40% target with 52%.
- The bank thinks it can gradually increase its share in the market for deposits, currently holding 11% against the market leader’s 20%.
- They spent Rs. 15 billion as a bonus for employees to recognize their hard work during the bank’s merger.
- The bank added 917 branches this year, and these branches are doing well, making about Rs. 2.7 billion each.
Valuation and Outlook
HDFC Bank, India’s largest private sector lender, reported stable financial results for Q4FY24, matching market expectations for net profit. Despite facing industry-wide pressure on profit margins from lending (NIM), the bank is choosing to focus on profitability rather than rapid growth. This strategy is supported by the sale of its subsidiary, HDFC Credilia Financial Services Ltd., for Rs. 7,340 crores, which helped strengthen its financial buffer against potential losses. The bank continues to see strong deposit growth, although the high cost of these deposits is a concern. To avoid a price war and improve customer service, HDFC Bank is not aggressively competing on deposit rates.
Plans to expand to over 13,000 branches in the next few years remain on track. The bank’s strong credit practices have led to better asset quality, and its focus on adjusting its loan portfolio and increasing retail deposits should help improve profit margins. The extensive branch network also provides opportunities to sell more services, supporting overall growth. Overall, the outlook for HDFC Bank remains positive for the medium to long term due to its profit-focused approach.
