The quality of the assets has always been the Bank’s fort and there were no negative surprises there.
It is a known fact that HDFC Bank has been reigning its commercial objectives to reduce its credit deposition ratio (CDR), which shot up to approximately 110 percent after its HDFC LTD fusion in Q2 Fy24. The results for Q4 Fy25 reflect what would expect from the bank, since it is withdrawn from this high CDR feeling. The quality of the assets has always been the Bank’s fort and there were no negative surprises there. That separate, a couple of things stood out and here they are.
CD ratio
To reduce the CD relationship, the strategy was to grow the loan book at a lower rate than the banking system in the 2015 fiscal year, along with the system in fiscal year 26 and demand the system in the fiscal year 27. Seven quarters after the merger, the CD ratio is now 96.5 percent. This is thanks to a modest loan growth (gross base) or 7.7 percent in fiscal year 2015, while the system grew 11 percent year after year. The bank only follows the script here and that is not bad.
The deposits grew faster than 10 percent of the system by 14.1 percent, acting as a catalyst to reduce the CD ratio. A couple of factors helped deposits to grow like this. The bank opened 717 new branches only in fiscal year 2015. That is approximately the size of the entire UJJIVAN branches, for the context. Secondly, such as early deposits, the cuts of the fee, they went in mass to reserve term deposits, which grew around 20 percent over the fiscal year 2014.
That said, the management has indicated that to support a growth of loans in line with the system in fiscal year 26, the reduction of the CD ratio will not be as aggressive as the sea in fiscal year 200, therefore, the operational leverage in the fiscal year26 will improve around fiscal year 200 and that implies better profits.
Margin image
However, never, margin compression could act as a steam. Here is why. Banks have been transmitting tariffs to borrowers and HDFC is no exception. Private banks in general, including HDFC, have a greater participation of loans linked to the repo rate in the mixture. The problem with such loans is that the transmission of speed to the borrowers occurs of what happens for deposits, which leads to margin compression.
However, there is a silver couple or coatings. First, the proportion of loans (HDFC LTD’s high cost debt is found here) in total liabilities is down. It is now 14 percent, compared to 21 percent of the axis or September 2023, the first quarter after merger. This padded margin of the impact of deposits fed by term deposits. As the bank returns debt values in the future, this favorable effect on NIM could continue.
Secondly, as fees are reduced, term deposits may not be thick and fast as they have done in fiscal year 2015, while at the same time, good traction can be expected in house deposits, since the new branches improve in the harvest. The interaction of the above factors in the margin remains to be seen.
Should you buy?
We recommend that investors accumulate the Bank’s shares in July 2024 when ₹ 1,618 was quoted with a price ratio (P/B) or 2.6x. The ratio is now in 2.8x and its 1 -year striker is 2.6x. Taking into account the in -line thesis factors with the system, margin compression probably in all private lenders, and negative surprises are not expected in the quality of assets unlike medium and small private banks: the stock is a good case for the accumulation of falls or around 10 percent.
Posted on April 21, 2025
