India's HDFC Bank Ltd. expects to improve its net interest margin in the coming quarters after the metric took a beating in the July-to-September period due to the combined effects of its merger with its parent, higher costs of deposits and regulatory changes.
HDFC Bank's net interest margin (NIM) fell to 3.4% in the fiscal second quarter from 4.1% in the previous three-month period, according to its first quarterly earnings statement since its merger with parent Housing Development Finance Corp. Ltd. became effective on July 1.
Analysts agree with the bank's assessment of a subsequent improvement. NIM will likely increase gradually toward 3.8% by the fiscal year that starts on April 1, 2024, as guided by the bank, Citi Research said in a note dated Oct. 17. Meanwhile, Nomura expects NIM drag to persist for another two or three quarters, according to a note circulated before the earnings report.
India's banks expect their NIMs to plateau after they gained from being able to pass higher interest rates to customers faster than having to pay higher on deposits. The central bank has held interest rates steady at its last four review meetings after a series of rate hikes since early 2022 to tamp down inflation. Most economists believe interest rates are close to a peak, though any cuts may happen only in 2024 as major global central banks, especially the US Federal Reserve, maintain tight monetary policy settings. Still, lenders are likely to gain from strong overall metrics.
Margin drag
Another drag on Indian banks' margins was an Aug. 10 order by the Reserve Bank of India to temporarily keep an incremental cash reserve ratio (ICRR) of 10% to absorb surplus liquidity in the banking system. The central bank later decided to discontinue the ICRR in a phased manner.
HDFC Bank "guides for healthy business growth with clear focus on mobilization of retail deposits without chasing high-priced bulk deposits which, coupled with absence of the ICRR impact, should aid gradual normalization in margin," Anand Dama, an analyst at Emkay Global, said in a note on Oct. 17.
The incremental reserve requirement "came with a cost," Sashidhar Jagdishan, HDFC Bank's chief executive, said at post-results earnings call on Oct. 16.
"I'm sure, with time, we will recoup some of the margins as we substitute the high-cost bonds with deposits and the changing mix of our business, loans mix more and more towards retail," Jagdishan said.
Healthy bottom line
HDFC Bank, India's biggest lender by market capitalization, reported a consolidated net profit of 168.11 billion Indian rupees in the second fiscal quarter, up 51.1% year over year. This translates to a return on assets in the quarter of about 2% and return on equity of about 16.2%, Srinivasan Vaidyanathan, chief financial officer said during the earnings call. The lender's net interest income rose 30.3% year over year to 273.85 billion rupees in the July-to-September quarter.
Total advances rose 57.7% year over year to 23.55 trillion rupees in the quarter ended September, following its merger with HDFC. Domestic retail loans grew 112.1%, commercial and rural banking loans grew by 29.5%, and other wholesale loans were up 7.9%, the lender said in a release. Overseas loans formed 1.7% of the total advances by the bank. Deposits surged 29.8% year over year to 21.73 trillion rupees during the quarter.
The bank's capital adequacy ratio based on Basel III guidelines rose to 19.5% as of Sept. 30, against 18.0% a year ago. The bank is required to keep the ratio at 11.7%, which includes a capital conservation buffer of 2.5% and an additional requirement of 0.2%, as the lender is identified as a domestic systemically important bank. The bank's common equity Tier 1 capital ratio was at 17.3% as of Sept. 30.
HDFC Bank's asset quality fell as the bank reported a gross nonperforming assets (NPA) ratio of 1.34% as on Sept. 30, down from 1.41% three months prior. The net NPA ratio also fell to 0.3% from 0.4%. The slippage ratio for the fiscal second quarter stood at 32 basis points, or about 78 billion rupees, Vaidyanathan said.
As of Oct. 16, US$1 was equivalent to 83.20 Indian rupees.
