HDFC Bank is facing challenges in closing the gap with ICICI Bank in terms of business momentum and profitability, despite improved loan growth and strong deposits in the latest quarter. Analysts highlight concerns over HDFC Bank's net interest margin (NIM), which fell 13 basis points to 3.4%, and its weaker retail growth.
The bank's reliance on costlier deposits and borrowings has led to margin compression, with its loan-to-deposit ratio reaching 95.8%. This leaves limited room for aggressive loan growth unless the funding mix improves. HDFC Bank's credit growth, although improved to nearly 16% year-on-year, still trails peers like ICICI Bank and Axis Bank.
ICICI Bank, on the other hand, reported stronger earnings with a net interest margin of 4.36% and a profit after tax of Rs 14,800 crore, up 16% year-on-year. Its advances grew 20%, driven by corporate, business banking, and rural loans.
“HDFC Bank has been unable to close the post-merger gap with ICICI across key operating metrics, including NIM, loan growth and CASA ratio.”
Anand Rathi
HDFC Bank's asset quality remains a positive aspect, with gross slippages at 1.1% of loans and a strong contingent provisioning buffer of Rs 48,900 crore. However, its retail loan growth has remained weak at 7.2%, impacting profitability.
Analysts suggest that HDFC Bank's main trigger for improvement will be margin recovery. Investors will watch for easing deposit costs, improved CASA growth, and reduced merger-related funding drag over the next few quarters.
“Credit growth improved, while higher funding costs weighed on margins.”
Emkay
Background
HDFC Bank's merger with HDFC has created challenges in maintaining competitive metrics against ICICI Bank. The bank's focus on corporate lending has impacted its margins, while ICICI Bank continues to outperform with stronger earnings and growth.
Looking ahead, HDFC Bank's focus will be on improving its margins and funding mix. Analysts will also monitor management stability and potential benefits from the FCNR(B) window. Despite current challenges, brokerages maintain Buy ratings on HDFC Bank due to reasonable valuations and a favorable sector backdrop.
