HDFC Bank to focus on improving return on assets: CEO

Mumbai: HDFC Bank will focus on profitability over growth in the medium term as the country’s largest private sector lender faces the twin challenges of a higher credit-to-deposit profile and lower core income.

Speaking to investors and analysts during a conference call, HDFC Bank CEO Shashidhar Jagdishan said sustainability of retail deposits is critical for the bank, for which it will continue to invest in distribution, people and technology.

After the stock took a big hit following disappointing third-quarter results, Jagdishan has been careful not to provide any guidance this time.

“Our focus is on improving the profitability matrix, defined by return on assets (RoA) and earnings per share. The most important thing is to focus on the retail deposit franchise. That will not be achieved through any shortcuts that we take. The key to sustainable momentum is our greater customer engagement and increased service-first culture,” said Jagdishan “We have realized that providing guidance is a distraction from long-term goals,” he added.

Read more: Fourth Quarter Results: HDFC Bank Announces Dividend ₹19.50 per own share

HDFC Bank reported 37% year-on-year growth in net profit in January-March on higher net interest income and stake sales in its education finance arm HDFC Credila. However, the bank reported a 0.85% sequential growth in net profit due to higher provisioning and lower growth in net interest income – the difference between interest earned and interest paid.

Net interest income, or core income, rose 2% quarter-over-quarter ₹29,077 crore in January-March 2024. Other revenues rose 63% sequentially to ₹18,166 crore, helped by a one-time gain of ₹7,341.4 crore from the sale of HDFC Credila to BPA EQT and Chrys Capital. The net interest margin (NIM) remained stable at 3.4%.

Asset quality remained stable, with a gross non-performing assets (NPA) ratio of 1.24% at the end of March, compared to 1.3% in the previous quarter. Similarly, net NPA as a percentage of total assets has increased marginally to 0.33% from 0.31% in the previous quarter.

HDFC Bank saw a threefold increase in provisions ₹13,500 crore at the end of March 2024. This included current provisions of ₹10,900 crore to cover potential losses in the future. The increase in provisions is due to the one-time gain from the sale of HDFC Credila.

The bank also saw a rollback in provisions for alternative investment funds (AIFs) amounting to ₹185 crore during the quarter. The bank had made the provisions for AIFs worth it ₹1,220 core in the third quarter.

“The bank has considered this an opportune stage to strengthen its current provisions, which are not specific to any portfolio but act as a countercyclical buffer to make the balance sheet more resilient, and these also qualify as Tier 2 capital within the legal limits. ”, the bank said in its press release.

Advances grew successively by 1.6% to more than ₹25 trillion at the end of March 2024. Deposits grew by 7.5% to ₹23.8 trillion in the same period.

The bank saw a ₹An increase of 1.6 trillion in total deposits during the January-March quarter. Of this, ₹1.3 trillion came from private deposits. As of March 31, 84% of the bank’s total deposits were retail in nature. The bank’s credit-to-deposit ratio fell to 105% from 110% in the previous quarter. During the call, Jagdishan said the CD ratio will remain subdued as the bank will have to pay maturities on HDFC’s bonds.

HDFC Bank also announced a dividend of ₹19.5 per treasury share ₹1 for the fiscal year ending March 31, 2024. It also received board approval to ₹60,000 crore of Tier 2 capital through bond instruments.

“HDFC Bank reported generally in line with Q4 24 performance. The year-on-year figures are not comparable as this is the third quarter to be reported on a merger basis. The results on the NIMs were slightly better than expected. Core credit costs remained lower. Higher other income due to HDFC Credila stake sale / tax writeback provisions offset higher operating costs and higher impact of contingent provisions on RoA, helping the bank to maintain RoA. 1.9%,” said Rahul Malani, research analyst at Sharekhan at BNP Paribas. “We should see banks gradually recoup margins as the bank replaces high-cost loans with deposits in the coming quarters and the changing credit mix towards retail.”