HDFC Bank margin drop widens operating gap with ICICI Bank
HDFC Bank's pursuit of corporate lending lifted loan growth but crushed margins, underscoring a persistent profitability gap with sector leader ICICI Bank that investors are no longer willing to ignore.
HDFC Bank reported a 13 basis point quarterly drop in net interest margin to 3.4%, a decline driven by its strategic push into corporate lending. While loan growth improved to nearly 16% year-on-year, the trade-off between expanding the balance sheet and defending profitability has left the bank trailing its primary rival.
"The Bank's desire to participate in corporate lending lifted loan growth to 16% YoY, but dragged NIMs," Jefferies noted. Corporate and small business loans rose roughly 18.7%, but retail growth remained stagnant at 7.2% for a third consecutive quarter, depriving the bank of higher-yielding, stable income.
The contrast with ICICI Bank is stark. ICICI posted a net interest margin of 4.36% and delivered profit after tax of Rs 14,800 crore, beating estimates by 10%. Its loan book expanded 20%, including a retail recovery to 12%, while its return on assets hit a peer-leading 2.5%.
"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 said. This underperformance has weighed heavily on HDFC Bank's stock, contributing to an estimated Rs 5 lakh crore erosion in shareholder value this year.
The root of the margin pressure lies in the bank's funding structure. Deposits grew 15% year-on-year, but cheaper current account savings account growth lagged at 9.4%. With the loan-to-deposit ratio already elevated at 95.8%, securing cheaper funding is critical before the bank can safely accelerate lending.
Asset quality provides a floor for the stock. Gross slippages remained contained at 1.1% of loans, with net non-performing assets at roughly 0.4%. Anand Rathi highlighted a contingent provisioning buffer of Rs 48,900 crore, which should cushion the transition to India's expected credit loss framework.
Investors are now looking toward the FCNR(B) window in July and August for potential funding relief, alongside the Reserve Bank of India's decision on extending the current chief executive's tenure. PL Capital trimmed its target price to Rs 1,040 while keeping a Buy rating, a stance shared by peers who cite reasonable valuations, though many continue to favour ICICI Bank and Axis Bank.
