Hdfc Bank Q3 Slower Loan Book Growth, High Credit Costs Likely To Impact Margins; 5 Key Things To Watch Out For

HDFC Bank Q3: Slower loan book growth, high credit costs likely to impact margins; 5 key things to watch out for

HDFC Bank Q3FY25 Earnings Preview: Slower Loan Growth, High Credit Costs Likely to Weigh on Margins

HDFC Bank, India’s largest private-sector lender, is set to announce its Q3FY25 earnings on Wednesday, January 22. The bank’s performance is expected to reflect muted growth as challenges such as higher credit costs, subdued loan growth, and an unfavourable loan-to-deposit ratio (LDR) continue to impact its profitability and margins. Here’s an in-depth look at the key factors shaping the expectations for HDFC Bank’s third-quarter results.


Key Factors to Watch Out For

1. Sluggish Credit Growth

In its Q3FY25 business update, HDFC Bank reported a marginal 3% year-on-year (YoY) growth in credit advances, which is likely to weigh heavily on its interest income. This subdued performance is attributed to a weaker macroeconomic environment and a slowdown in overall credit demand across the banking sector. The modest credit growth could result in softer earnings for the bank, particularly in its core interest income.

2. Sharp Rise in Deposits and Unfavourable LDR

HDFC Bank has been focusing on improving its loan-to-deposit ratio (LDR) following its merger with erstwhile HDFC Ltd. The LDR ratio for Q3FY25 is expected to hover around 100%, as total deposits surged by 16% YoY to ₹25.6 lakh crore. While this reflects the bank’s efforts to bring the LDR below 100 for better credit cost control, it also highlights the ongoing challenges in balancing advances and deposits.

The bank’s total advances stood at ₹26.5 lakh crore in Q3FY25, showcasing its ability to maintain a robust lending portfolio. However, the sharp rise in deposits could put pressure on margins, as the cost of funds rises with an increasing deposit base.

3. Muted Net Interest Income (NII) Growth

The bank’s net interest income (NII) is expected to grow in the low single digits, reflecting the impact of muted credit growth and higher credit costs. NII, a key measure of a bank’s profitability, is likely to remain under pressure as HDFC Bank continues to focus on stabilizing its LDR post-merger.

4. Asset Quality Concerns

The retail and small finance segments have shown signs of asset quality deterioration, a trend observed across the banking industry. For HDFC Bank, these challenges are compounded by post-merger integration issues, which have added to the strain on asset quality. The bank may face higher provisions for bad loans, further impacting its profitability for the quarter.

5. Subdued Profit Growth

HDFC Bank’s net profit growth for Q3FY25 is projected to remain in the low single digits. According to Investing.com consensus estimates, the bank’s net profit is expected to remain flat at ₹16,800 crore. Higher provisions for bad loans, coupled with weak loan growth and elevated credit costs, are the primary contributors to the subdued profit trajectory.


Performance in Q2FY25

In the previous quarter, HDFC Bank delivered a muted performance, with its net interest income growing 10% YoY to ₹30,113 crore compared to ₹27,300 crore in Q2FY24. Sequentially, NII growth was flat. The standalone net profit stood at ₹16,800 crore, reflecting a 5.5% YoY increase. Provisions for bad loans during the quarter dropped by 7% YoY to ₹2,700 crore, offering some respite to the bottom line.


Broader Industry Context

HDFC Bank’s Q3FY25 results come amidst a challenging environment for the banking sector, characterized by rising credit costs, slowing loan growth, and increasing deposit mobilization efforts. The bank’s focus on balancing its LDR and maintaining asset quality post-merger will be critical to its future performance.


HDFC Bank Share Performance

In the October–December 2024 quarter, HDFC Bank’s shares provided a 2.5% return. For the calendar year 2024, the stock outperformed the benchmark NIFTY Bank index with a 3.8% gain. Investors will be closely monitoring the Q3FY25 results to gauge the bank’s ability to sustain this momentum amid economic headwinds.


Conclusion

HDFC Bank’s Q3FY25 results are expected to reflect a challenging quarter, marked by slower loan growth, elevated credit costs, and pressure on margins. While the bank’s efforts to improve its LDR and manage asset quality are commendable, the near-term outlook remains cautious. Investors and analysts will keenly watch the bank’s commentary on credit growth, deposit mobilization, and post-merger integration to assess its future performance.

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