HDFC Bank Faces Q1 Weakness Despite MSCI Lift: What's Next?

Two days after HDFC Bank reached a new record high of ₹1,791 per share, potentially boosted by MSCI inclusion, the lender released a weaker-than-expected business update for the April-June quarter (Q1FY25), raising concerns among analysts. Although Q1 is usually a softer quarter, brokerages became cautious about the bank's high credit-to-deposit (CD) ratio, which might pressure future margins.

At 12:00 pm IST HDFC share price was at ₹1655.40. Over the past month, HDFC Bank's stock has surged by over 16%, outperforming the Nifty 50 index's 7% rise. However, on a year-to-date basis, the stock has underperformed, increasing by just 1% compared to the Nifty 50's 11% gain.

In its Q1FY25 update, HDFC Bank reported a robust 52.6% year-on-year (YoY) growth in gross advances, reaching ₹24.87 lakh crore. However, this figure represented a 0.8% quarter-on-quarter (QoQ) decline from ₹25.07 lakh crore in Q4FY24, primarily due to a reduction in corporate and wholesale loans.

Similarly, total deposits increased by 51% year-on-year (YoY) to ₹23.79 lakh crore in Q1FY25 but remained flat sequentially due to seasonal factors affecting CASA accounts.

Following this, analysts at brokerage firm Nomura noted that HDFC Bank's figures were slightly below expectations and maintained a 'neutral' rating with a target price of ₹1,660. They observed that both loan and deposit growth were seasonally soft in Q1, with average deposit growth at 4.6% quarter-on-quarter (QoQ). 

CLSA also highlighted weaker-than-expected deposit growth in Q1FY25 compared to previous quarters, though they maintained an 'outperform' rating with a target price of ₹1,725 per share. They noted that the total deposit book remained flat quarter-on-quarter (QoQ), in contrast to previous quarters which saw an accretion of ₹30,000-45,000 crore. This was attributed to a significant run-down of current account deposits from the previous quarter.

Given this scenario, all eyes will now be in margin trends for the bank. While Macquarie expects NIMs to broadly remain unaffected, Nomura said that they expect some contraction in Q1FY25.

Recent investor sentiment towards HDFC Bank improved after foreign ownership fell below 55% in June, raising expectations of increased MSCI inflows in August 2024. Jefferies predicted that MSCI might increase HDFC Bank's foreign inclusion factor from 50% to 100%, while UBS forecasted potential future buying worth $3-6.5 billion in the bank.