Global brokerage house CLSA has released insights from interactions with over 20 clients following HDFC Bank’s third quarter earnings release earlier this week. Both domestic and foreign investors aired varied views on the largest private sector lender’s performance and outlook, though some consensus points around bottoming out of the challenges also emerged from the discussions. 


According to the note published by CLSA, most Indian clients expressed unhappiness with HDFC Bank‘s December quarter numbers. They felt that pressure on earnings per share (EPS) is likely to continue going forward as it will be difficult for the bank to maintain its targeted loan growth in the 15-17% range while also expanding net interest margins (NIM). Achieving deposit accretion of Rs. 4.5-5 lakh crore annually, as required to fuel loan growth, would necessitate competitive pricing that cuts into the NIM, clients argued. 

In contrast, foreign investors signaled a less bearish stance with the ratio of skeptics to optimists assessed to be lower among overseas clients. Many international investors noted indications that the worst may be behind as key metrics should trend up from this point, aided by synergies from recent acquisitions still unfolding. 

While concerns around deposit mobilization and NIM were shared by domestic and global clients alike, some discussion pointers pointed to a turning tide. A few clients highlighted that dampening deposit growth reflects broader liquidity tightness in the financial system rather than bank-specific issues. There were also views questioning if retail loan expansion effects on NIM would drag on as long as initially projected.

On the system-wide liquidity crunch, CLSA believes the Reserve Bank of India can play a supportive role through a combination of forex market interventions, trimming of cash reserve ratio requirements and open market bond purchases. An infusion of $10 billion in forex inflows in the current quarter alone could help narrow dollars deficit that is feeding into money market shortfalls. The brokerage estimates every Rs. 1 of durable liquidity addition results in Rs. 4.6 crore of aggregate deposit accretion over 6-12 months for banks. 

With continued stake reduction under the Government’s disinvestment program, HDFC Bank is set to witness moderation in excess SLR holding dragging on earnings. However, with signs of steadying macro parameters and financial conditions, investor feedback gathered by CLSA points to belief the worst is over for the banking heavyweight. Successful navigation of current challenges could see it building fresh momentum ahead.