Shares of HDFC Bank Ltd. saw a rebound on Thursday, following a significant drop in their performance over the past two days. The bank had attributed this decline to net interest margins and weaker deposit growth. However, in the third quarter, despite the absence of certain requirements and a decline in excess liquidity, the bank reported flat net interest margins compared to the previous quarter.
HDFC Bank’s U.S.-listed stock (HDB) experienced a 1.9% increase in premarket trading on Thursday. In contrast, the stock had dropped by 6.7% on Tuesday and further declined by 9.1% on Wednesday, reaching its lowest level in 18 months. The two-day decline of 15.2% marked the worst performance since March 23, 2020, when it tumbled by 17.6% over two days.
Net Interest Margin (NIM)
In the third quarter, HDFC Bank reported a core net interest margin of 3.4% on total assets, which remained unchanged from the second quarter. However, this figure was below the 4.1% reported during the same period last year. Net interest margin refers to the difference between the bank’s earnings from assets, such as loans, and its expenses on liabilities like deposits.
Despite the recent challenges faced by HDFC Bank, its shares showed signs of recovery after the disappointing performance. The bank’s focus on managing net interest margins and deposit growth will be crucial moving forward to sustain and improve its financial performance.
Analysis of HDFC’s Performance and Concerns
Gundlapalle, a financial analyst, has expressed his concerns regarding HDFC’s recent performance, particularly regarding the Net Interest Margin (NIM) surprise, weaker deposit growth, and the lack of a clear path to normalization.
NIM Surprise and Uncertainty
Gundlapalle is unsure about the causes of the NIM surprise. He speculates that it may be due to a systemwide increase in the cost of funds or a consequence of choosing expensive liability sources. The uncertainty surrounding this issue raises questions about HDFC’s financial stability.
Impact on Loan Growth and Margins
The analyst is also worried about the potential impact of continued weak deposit growth. He believes that if deposit growth remains sluggish, it could limit loan growth and further erode margins. This, in turn, would lead to reduced earnings growth for HDFC.
Third-Quarter Deposit Growth
HDFC reported a modest increase of approximately 2% in third-quarter deposits compared to the previous quarter. However, when compared to the same period last year, the deposits have shown a significant growth of nearly 28%.
Stock Performance and Outlook
Despite the concerns mentioned above, Gundlapalle maintains an outperform rating on HDFC’s stock. He has confidence in the bank’s ability to eventually improve its operating metrics. In fact, his stock price target suggests an upside potential of 34.5% from the latest closing price in India trading.
However, it is essential to note that HDFC’s U.S.-listed stock has experienced a decline of 3.2% in the past three months and a significant drop of 19% in the past year. In comparison, the iShares India MSCI ETF INDA has witnessed a positive growth of 15% over the same period, while the S&P 500 index SPX has advanced by 20.6%.
In conclusion, while HDFC faces challenges related to NIM surprise, weaker deposit growth, and margin erosion, analysts like Gundlapalle believe in its potential for improvement. Investors should closely monitor the bank’s performance and market trends to make informed decisions.