HDFC Bank reported its results for the for the quarter ended December 2024 yesterday. The numbers were largely in line with expectations, given the bank’s transition phase post the merger with HDFC Limited. Here are the key takeaways.

Advances growth

The bank’s deposits grew 15.8 per cent and the advances grew a mere 3 per cent year on year during Q3 FY25. This slow growth in advances needs to be seen in light of the bank’s efforts to bring the credit-deposit ratio (CDR) down to comfortable levels, which shot up above 100 per cent levels post the merger with erstwhile HDFC Limited. A year ago, as of Q3 FY24, the CDR was 110.5 per cent. It has now been brought to 98.2 per cent, at an average rate of around 3 percentage points each quarter.

In the earnings call of Q2 FY25, the management communicated a growth trajectory where, growth for FY25 would be lower than system level growth, FY26 growth will be at par with the system, and by FY27, the bank’s growth will exceed the system. The bank appears to be on track, well aided by the 15.8 per cent growth in deposits, exceeding system level deposit growth of 9.8 per cent. The bank has been consistent in deposit growth so far this year, growing above 15 per cent in all three quarters of FY25. The management note that the bank has enough capital adequacy and LCR (liquidity coverage ratio) buffer to step up growth, when the time comes.

Modest CASA growth

Term deposit growth during the quarter came in at 22.7 per cent year on year and 4.6 per cent quarter on quarter. While term deposits boosted the overall deposit growth, low-cost CASA (current account savings account) balances grew by a modest 4.4 per cent year on year and degrew by 1.2 per cent quarter on quarter. The CASA (CASA balances divided by total deposits) ratio now stands at 34 per cent having declined from 37.6 per cent as of Q2 FY24, the first quarter post the merger.

A major cause of such CASA growth is the liquidity tightness in the system. CASA growth of other private banks such as Axis Bank and Kotak Mahindra Bank came in even lower at 2.2 per cent and 2.8 per cent respectively.

However, HDFC’s cost of funds and net interest margin have remained stable during the quarter. This is probably because the bank has been retiring the high-cost debt inherited from HDFC Ltd as and when opportunities arise.

Stable asset quality

Gross NPA ratio was up by three basis points to 1.36 per cent from 1.33 per cent as of Q2 FY25. Slippages on an absolute basis were up 12.8 per cent quarter on quarter. This was mainly due to the seasonality of the bank’s Agri portfolio. Apart from the Agri book, all other books including the retail book – both secured and unsecured, remain stable and the management do not see any stress emerging. This is one factor that differentiates the bank from peers such as Axis Bank and Kotak Mahindra Bank, which are struggling with stress in their unsecured portfolios.

We had given an accumulate call on the stock in our bl.portfolio edition dated July 28, 2024, when it was trading at 2.6 times trailing book value. Today, the bank still trades at a similar valuation. While true growth may be a few quarters away, investors can take heart from the fact that the bank is progressing as per the management’s outlined plan. Given the bank can return to growth once it wades through the transition phase, and with its superior track record on asset quality, we maintain our accumulate rating on the stock.

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