• Deposit Growth: Average deposits grew by about 15% year on year.
• Advances Growth: AUM advances increased by 8% year on year.
• Branch Expansion: Over 1,000 branches added in the past 12 months.
• Cost Growth: Costs increased by 7% year on year.
• Liquidity Position: Near neutral liquidity in Q3 with a peak negative of INR 2 trillion to INR 2.5 trillion.
• Net Interest Margins (NIMs): Remained stable despite tight liquidity conditions.

• Warning! GuruFocus has detected 3 Warning Signs with HDB.

Release Date: January 22, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• HDFC Bank Ltd (NYSE:HDB) reported robust deposit growth of 15%, outpacing loan growth, despite challenging macroeconomic conditions.
• The bank maintained stable Net Interest Margins (NIMs) despite tight liquidity and pricing environments.
• HDFC Bank Ltd (NYSE:HDB) added over 1,000 branches year-on-year while keeping cost growth at a modest 7%, indicating productivity gains.
• Credit parameters, including slippages, gross NPA, and credit costs, remained resilient and stable, showcasing the bank's strong credit management.
• The bank is well-positioned with sufficient liquidity and capital to capture market share in loans when macroeconomic conditions stabilize.

Negative Points

• The macro environment remains challenging with tight liquidity, moderating urban demand, and capital outflows due to global uncertainties.
• The bank faces a shortfall in meeting priority sector lending targets, particularly in the small and marginal farmer and weaker sections.
• There is pressure on margins due to a shift in deposit mix towards higher-cost time deposits, impacting CASA ratios.
• The bank's Provision Coverage Ratio (PCR) is lower compared to peers, raising concerns about its adequacy in covering potential loan losses.
• HDFC Bank Ltd (NYSE:HDB) has not yet realized significant merger synergies in terms of improved margins or reduced cost ratios, despite the merger being 18 months old.

Q & A Highlights

Q: Can you provide details on how you met the Priority Sector Lending (PSL) requirements without a significant increase in operating expenses? A: Our PSL target of over 40% was met through various strategies, including organic growth, Inter-Bank Participation Certificates (IBPC), and Priority Sector Lending Certificates (PSLC). The cost of PSL is embedded within our overall Return on Assets (ROA) structure. We did not have significant PSLC purchases this time, but the year is not over. Our Provision Coverage Ratio (PCR) excluding agricultural loans is 71%, and we received a tax refund of INR 2 billion this quarter.

Q: What is the yield on the excess liquidity you have on the balance sheet, and what is the weighted average cost of borrowing maturing over the next two years? A: The excess liquidity is invested by the treasury at yields ranging from 6.5% to 7%. The borrowing cost is about 8%, including costs from HDFC Limited borrowings. We manage this dynamically, optimizing opportunities as they arise. We released INR 3 billion in contingent provisions this quarter due to cash recovery from a large wholesale account.

Q: How do you view the credit environment for unsecured loans and the commercial banking business? A: The credit environment remains stable across unsecured and commercial banking segments. Our credit monitoring and collection analytics are robust, ensuring stability despite slower book growth. We are confident in maintaining our strength in these portfolios.

Q: Can you discuss the impact of the merger on margins and cost ratios, given that they have remained stable 18 months post-merger? A: The macro environment has changed significantly since the merger, requiring us to recalibrate our approach. We are focusing on maintaining stability and are positioned to capture growth opportunities as the macro environment improves. The cost-to-income ratio remains stable at around 40.5%, with ongoing investments in technology and distribution.

Q: What is the outlook for loan yields compared to peers over the next two to three years? A: Loan yields are a function of the asset mix. As retail growth picks up, we expect yields to trend upwards. Our risk-weighted asset density is lower than peers, indicating a lower risk profile. We anticipate convergence in risk density and yields as the retail mix increases.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.