HDFC Bank Q3 Results: 96% of Analysts Rate 'Buy' on Strong Margins

Introduction to HDFC Bank's Strong Quarter

HDFC Bank Ltd. is set to be a key stock in focus following the announcement of its December quarter earnings. The private sector lender delivered a robust performance that surpassed analyst expectations, driven by an expansion in margins and resilient asset quality. The strong results have reinforced confidence among market analysts, with an overwhelming 96% of those covering the stock recommending a 'Buy' rating.

Detailed Quarterly Financial Performance

For the third quarter of the financial year, HDFC Bank reported an 11% year-on-year increase in profit after tax, a figure that comfortably beat market estimates. This growth was supported by a 6% rise in net interest income (NII) compared to the same period last year, which was in line with expectations. The bank's pre-provision operating profit (PPOP) also saw a healthy 8% year-on-year growth, meeting analyst projections. The solid operational performance indicates the bank's ability to navigate the current interest rate environment effectively.

Impact of One-Off Provisions and Gains

The quarter's profitability was influenced by several non-recurring items. On the positive side, provisions were significantly lower than anticipated, primarily due to the release of ₹1,040 crore in contingent provisions after a large borrower group met specific conditions. Additionally, other income was boosted by trading and mark-to-market gains of approximately ₹930 crore. However, the bottom line was also impacted by incremental employee expenses of about ₹800 crore related to the implementation of the new labour code and an additional provision of ₹500 crore following a regulatory inspection. The bank has clarified that these provisions are fully accounted for.

Margin Expansion and Asset Quality Shine

A key highlight of the quarter was the improvement in Net Interest Margins (NIMs). The bank's NIM expanded to 3.51%, an 11 basis point increase from the 3.4% reported in the September quarter. This improvement was stronger than the 6 basis points expansion that analysts had forecast. The bank's asset quality remained pristine, with management confirming that no specific portfolio or segment is showing early signs of stress. Calculated credit costs also eased to 41 basis points from 51 basis points in the previous quarter, aided by the contingent provision release.

Management Commentary and Future Outlook

HDFC Bank's management provided a confident outlook during the earnings call. They reiterated their goal of achieving a loan-to-deposit (LDR) ratio of around 95% by the end of FY26, with a further moderation to the low 90s by the end of FY27. The management team sees clear visibility on margin improvement over the next two to three years and aims to outperform the system credit growth, which is projected at 12-13% in FY27. In a notable management change, Executive Director Bhavesh Zaveri has requested that his re-appointment not be considered.

Analyst Consensus and Brokerage Views

The analyst community has responded very positively to HDFC Bank's performance. Out of 48 analysts with coverage on the stock, 46 have a 'Buy' rating, while only two recommend a 'Hold'. There are no 'Sell' recommendations.

Addressing Key Concerns

While the overall results were strong, some brokerages, including Jefferies and Kotak, raised concerns about the moderated deposit growth, which stood at 12% year-on-year. In response, the bank's management clarified that this was a conscious decision to let go of higher-cost wholesale deposits to protect and improve margins. They expect deposit growth to pick up, which will help in gradually lowering the loan-to-deposit ratio.

Conclusion

HDFC Bank's December quarter results demonstrate a solid operational footing, with profit growth and margin expansion exceeding expectations. While navigating one-off expenses, the bank's core performance and pristine asset quality have solidified analyst confidence. The key focus for investors will be on the bank's ability to accelerate deposit mobilization to fund its ambitious growth targets and manage its balance sheet efficiently in the coming years.