CASA will become a meaningful metric only if the bank holds a large chunk of HNI or Corporate accounts. This is where the foreign banks like Standard Chartered and erstwhile Citi bank had an edge. If the majority of the accounts are from mid to low income group or salary accounts (as it is for most big Indian private banks), the outflow happens quickly for loans, EMIs and the balance is negligible. Indian banks should shift focus and target the turf hold by foreign banks to improve the CASA. While the cost of funds may be slightly higher, FDs and RDs still play a significant role on the asset side of any banking franchise.
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Yeah, premiumization is a key theme across banks now. Everyone is chasing the HNIs, NRIs, Senior citizen profiles for ticket size. Corp sal type accounts will remain key though because they’re granular and thus not as prone to rate change.
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Good comparison of recent quarter results.
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There is other side to this argument.
I know quite a few HNIs but I don’t know anyone who keep their cash in savings accounts. They are usually savvy investors or have their wealth managers who deploy their money in higher yield asset classes (real estate, equity, gold etc) and avoid keeping them in low yielding savings account.
Lower income or salaried middle class on the other hand can be more attractive for banks because either they keep their money in savings accounts or do term deposits in the same banks thus providing a sticky source of capital.
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Forget the title which simply sweep off the fact that the Bank’s shares has not given any meaningful return after the initial sharp run post covid.
But could this be the end of a long consolidation phase.
Finally some focus on tech which has been a pain point for a long time. Might be nothing or something.
Disc. Invested
Despite extreme pessimism, bleak commentary, lots of arguments about stretched valuations and questions as to why this stock should run at all, counter has quietly gone up 35% since its lows a few months ago, becoming one of the best Nifty performers. And none of the so called overhangs are completely gone yet. But I’m sure if stock continues to appreciate, we’ll have people start looking at the positives.
One thing I have seen from the market, a falling stock is a magnet for all the negative news and a rising one for all the positive narratives. Reality is always in the middle.
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I have been trying to make up my mind on buying HDFC, however there is one key factor that is holding me back, any insights would be helpful.
The reason to buy:
1.Currently stock is very close to historically low price/book value
2. My anticipation of a low interest rate environment which would benefit in two ways:
a) The pass through of interest rates to customers would take some time and in the meanwhile low interest rates would benefit the bank
b) When low interest rates are finally passed through, it might create pressures on NIM (net interest margin) and that is where well run banks would benefit compared to say a PSU bank and I believe HDFC to be among well run banks
c) Low interest rate environment should result in loan book growth which should mitigate the impact on NIM
3. I believe the bank is fundamentally sound
BUT Reasons that are holding me back
- Price is at an all time high
- Bank is a heavyweight and it would take mountains to move (the price of stock) and so given the volatility if bought at all time high and then falls due to market volatility and takes years to get back up (since it would take mountains to move), fear of this scenario is holding me back.
Any suggestions on how to look at the whole thing ? Much appreciated
Thanks
Nishant
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The reasons holding you back are immature:
1.Price is at all time high: After global financial crisis the stock has consistently hit all-time highs year after year barring the last few years. Thats how good company stocks work. Instead of focusing on price focus on valuation.
2.Mountains to move: True it will take considerable inflows to move the price. So, what, if there is value, capital will eventually find its way. If fundamentals are good and book value keeps growing new peaks will get created.
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Nishant,
You need to first define your return expectations, risk apetite, allocations and time horizon.
Ultra large cap stocks like HDFC will not give you 3-4x return in 5-6 years. And also they will test your patience from time to time with occasional long drawn underperformance. On the other hand it’s highly unlikely you will lose your sleep over Hdfc bank during the phases of steep market correction (on the contrary stock has a history of outperforming index during bear or dull markets).
Regarding whether Hdfc bank is a good stock or not, my simple big picture logic (which I gave when stock was being panned by everyone) is that Indian stock market will not perform over a long term without banks performing as the latter are a proxy for economic growth. And when it comes to banks large caps stocks are always preferred by big and smart money. Hdfc bank, axis, kotak bank stocks have already been through a lean phase over last 5 years while there hasn’t been much wrong with quality of their businesses. So when eventually mean reversion in their valuation kicks in, I see plenty of upsides in their stock prices.
Now there are folks who will go into micros talking about merger overhang, deposit growth, operational nitty gritty and tell you why bank is a gone case. From my experience best time to buy quality stocks is when you see pessimism around it and vice versa. And too much microanalysis is fruitless for large caps quality stocks because they are least impacted by retail sentiments.
So when FIIs return to Indian market they will first buy banks. So on a risk reward basis I find large cap banks very attractive.
I told some in my family circle to buy stock when it was 1400 early this year and they are happy with return they have got. But now after 30% move stock definitely is not a screaming buy. But all said, Hdfc bank is a high quality, well managed bank and anyone with a long time horizon can look at it.
But again a lot depends on what your investment goals are.
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Agree to almost everything that you mentioned Hemant, actually in the current scenario I am a bit late to the party (30% run up already happened) but I also see that not every stock in a portfolio can be a 3x/4x/10x thing and there would have to be a balance, my time horizon is a bit short (2 years) for the likes of HDFC with return expectations of 15 to 20% ( let’s call it 17.5) which again is on higer side for the likes of HDFC but the portfolio balancing reasoning does it for me …and so If I don’t have to become a heart patient ;)…HDFC should be a good bet .
Thanks @Hemant_Kumar2 and thanks @laxman_sreekumar
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RBI cuts CRR by 50 bps, freeing Rs 1.16 lakh crore
Banking stocks rise on RBI’s liquidity-boosting CRR cut
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Is this news good for HDFC Bank?
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No. This has no relation to HDFC bank, investments will be made MF schemes, insurance schemes etc. HDFC bank derives no benefit.
However, it is good news for Kotak/AU as demand for their stocks will increase due to buying from these schemes.
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Ater reviewing HDFC Bank’s latest performance for the December 2024 quarter, I wanted to share some observations and concerns regarding its current strategy and the potential impact on its financials.
1. Lending Growth and CD Ratio Impact
One notable observation is the moderate lending growth, with the bank’s advances growing at a slower pace compared to previous periods. This suggests that the bank may be limiting its lending activity, potentially as a strategy to reduce its Credit-Deposit (CD) ratio. This could be a short-term measure in light of the ongoing HDFC merger effect, where the bank may be focusing on consolidating its balance sheet post-merger, instead of aggressively expanding its loan book.
2. Deposit Mobilization Concern: Shift to Term Deposits
Another critical concern is the lower mobilization in CASA deposits. While there was some growth in CASA deposits, the overall CASA ratio has declined sequentially. More troubling is the significant increase in term deposits, which saw a growth of 21.5% YoY. While term deposits are a stable source of funding, they come at a higher cost compared to CASA. This shift could result in a higher cost of funds, which might put pressure on the bank’s Net Interest Margin (NIM).
3. Potential Margin Compression
With a higher proportion of term deposits, the bank may experience margin compression as the cost of funds rises. Additionally, if the rate cut cycle begins, there’s a risk that advances will be repriced faster than liabilities. Since term deposits have longer durations and higher rates, any reduction in interest rates could result in a disproportionate reduction in lending yields compared to deposit costs. This scenario would further compress the bank’s margins, as the bank’s loan book is repriced quicker than its deposit base.
4. Impact on Interest Income
Given the slowdown in lending and the shift towards costlier term deposits, it will be crucial to monitor how interest income evolves in the coming quarters. If the bank continues to lend cautiously, the growth in interest income may be subdued, especially if margins are compressed further.
Conclusion
HDFC Bank’s cautious lending approach, potentially driven by the merger consolidation, and the higher reliance on term deposits are clear strategic choices. However, these could lead to higher funding costs and margin compression, particularly if interest rates start to decline. The coming quarters will be critical in understanding how the bank balances its funding costs and interest income in the face of these challenges.
It will be interesting to see how HDFC Bank manages these dynamics and whether it can sustain its profitability with a more conservative lending approach and an evolving deposit mix.
I’d love to hear your thoughts on the bank’s strategy and how you see its performance shaping up in the current environment.
Disc: Invested
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Sir, assessment is in line with what management guided in q2fy25 concall. While profitability is likely to be under pressure (not grow, it doesnot mean de-growing), complete attention is to fast track CD ratio, and, improve health of the system. And, then go back mid to high teens runrate.
This also aligns with potential credit risks which may be present in the broader economy currently (unsecured, personal, MFI etc loans).
I am not sure, but, timeline for this re-adjustment can be somewhere between 18-24 months.
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t appears that the market is not willing to wait for 18 months, as reflected in today’s reaction. While I avoid relying too much on quarterly statements, they are useful for understanding trends.
Looking at the last financial report, the yield on interest-earning assets for HDFC Bank and ICICI Bank stands at 7.2% and 8.46%, respectively, while their cost of funds is 6.0% and 4.89%, respectively. The difference in spreads is notable. Additionally, HDFC Bank has reduced its lending, and CASA growth remains inadequate. To address liquidity needs, the bank has resorted to term deposits.
The RBI is expected to initiate rate cuts soon, and this poses another challenge: assets will likely be repriced faster than liabilities, leading to further compression in NIM (Net Interest Margin). Naturally, this could push fund houses to explore other private banks with stronger metrics.
Another crucial aspect is the borrowing (bonds) inherited from the erstwhile HDFC Ltd., with payments structured as bullet repayments in the next two to three years. This adds to the complexity of managing the balance sheet.
Although asset quality across the banking sector is currently strong, the RBI has flagged potential delinquencies in unsecured loans (personal loans and credit cards). Investors are, therefore, expected to remain cautious.
In summary, HDFC Bank is navigating a tightrope. It needs to address multiple challenges simultaneously—managing spreads, maintaining asset quality, repricing liabilities, and preparing for bond repayments—to emerge successfully from this phase.
Disc: Invested. I am not SEBI registered.
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Recently, HDFC Bank announced its Q3-25 results. The following are the interesting points noted in the earnings call, which I suggest you read along with the reported results,
- Lower Yield Compared to Peers: Bank clarified that loan yields are tied to the asset mix, if we look at the current risk-weighted assets (RWA) stands at 67%, which is lower by 5-7 percentage points compared to peers, indicates the bank’s lower risk profile due to cautious lending practices.
- Reason for Steady NIM at 3.4%: Banks clarified that while coming down 18 months since the merger, the market dynamics have entirely changed, and higher borrowing costs and slower CASA, which impacts low cost funding, and also as part of prioritizing the overall customer relationships, including the time deposits, weighs on margin as time deposits are costlier than CASA Deposits, The bank is focused on optimizing the deposit mix by prioritizing low-cost retail deposits over high-cost bulk deposits, aligning with its broader strategy, and management anticipated that as the macroeconomic conditions improved, deposit pricing may ease, leading to CASA Growth and potential margin improvement.
- Cost to Income Ratio: Stable at ~40%-41%, attributed to controlled cost growth (~7.5%) despite inflationary pressures (~5%-6%). Over 1,050 branches were added in the past 12 months. Technology investments now represent over 10% of costs, up from high single digits, ensuring operational robustness. Despite higher costs, the cost-to-assets ratio stands at 1.93%, showcasing efficient cost management relative to the bank’s asset base. Management suggests improvement in cost-to-income ratios may materialize as macro conditions stabilize, deposit costs normalize, and revenue growth from strategic investments materializes.
- Growth Strategy: LDR is at 98%, The bank has consciously slowed growth this year to optimize risk, pricing, and productivity. Ample liquidity and capital position provide confidence to scale growth when conditions are favourable. The guidance of slower growth this year, in-line growth next year, and faster growth by FY27 remains intact, driven by macroeconomic improvements and internal readiness.
- Performance of Loan Book: Book is stable. The bank has seen consistent stability in its loan books across all segments. Even though the bank’s loan book is growing at a slower rate than the industry (approximately half the rate), the credit metrics, such as slippage rate and credit cost, remain stable. this demonstrates: High origination quality (i.e., loans are given to low-risk borrowers). Effective collections capability, even during challenging macroeconomic conditions.
- Provision coverage Ratio: PCR should not be viewed as a universal metric to compare banks directly because provisioning strategies and loan types vary. For example, an institution with a higher wholesale NPA might have a higher PCR due to more provisions for those loans, whereas a bank with a significant portion of retail unsecured loans might have a lower PCR until those loans reach a later stage in the provisioning cycle.
- Contingent Provisions: Contingent provisions are created for potential events that are uncertain, not for NPAs (Non-Performing Assets), but for other credit risks that may materialize. The process for managing contingent provisions is discretionary, based on HDFC’s credit risk assessments, and follows a documented procedure to assign provisions based on the likelihood of certain events.
- Agri Slippages: The increase in Q3 agri slippages is seasonal and expected, with no link to microfinance. The microfinance book is a small, stable segment. The microfinance book is a separate segment, accounting for less than 1% of HDFC Bank’s total loan book, with 5% of the workforce dedicated to it. The microfinance book is well-performing, primarily linked to women in rural areas and managed by relationship managers to support their activities. The coverage ratio on agri loans is lower due to them being secured, and the Loss Given Default (LGD) for agri loans is lower compared to other segments, according to the Expected Credit Loss (ECL) model.
- Priority Sector Lending: The bank is addressing the PSL shortfall in SMF and weaker sections, with plans to meet the requirements by the fourth quarter of the year. The strategy focuses on organic growth while considering alternative instruments if necessary.
Sashidhar Jagdishan: Managing Director and Chief Executive Officer:
“Going into the future, we are robustly positioned. We have been growing in a very balanced and manner in-line with what we had committed to ourselves and to the world at large in terms of the glide path on the CD ratio or the kind of growth levels that we are anticipating. As we speak, we have sufficient liquidity. We continue to grow our deposits faster than the system, we have sufficient capital, allowing us to be very comfortable to grow or capture market-share in the loans when macro turns favourable”
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