Detailed Narrative
HDFC Bank concluded its Q3 FY25 earnings call on January 22, 2025, reporting on the period ending December 31, 2024. The management acknowledged a challenging macro environment characterized by tight liquidity, moderating urban demand, and tepid private capital expenditure. Despite these headwinds, the bank demonstrated resilience with robust financial performance and strategic progress. Key highlights include a 15% year-on-year growth in average deposits and an 8% year-on-year increase in AUM advances. The bank successfully contained its cost growth at 7% year-on-year, reflecting productivity gains.
The bank's asset quality remained stable, with an overall Provision Coverage Ratio (PCR) of 68%, rising to 71% when excluding seasonal agricultural loans. Notably, the bank reported a negative mark-to-market of INR2.5 billion on an inherited equity position this quarter. In a positive development, INR3 billion in contingent provisions were released following cash recovery on a large wholesale account. The Loan-to-Deposit Ratio (LDR) stood at 98%, indicating improved liquidity management. Strategic initiatives included adding over 1,000 branches in the last 12 months and increasing employee headcount by 2,500-3,000 in the quarter, reaching 210,000.
Management provided specific guidance regarding future growth and operational metrics. They aim to reduce the credit-deposit ratio as quickly as possible over a 2- to 3-year timeframe. AUM growth is projected to be slower than the system in FY25, in line with the system in FY26, and faster than the system in FY27. The bank also expects its retail mix to increase, leading to an upward trend in overall book yield. On the priority sector front, HDFC Bank confirmed meeting its aggregate PSL target of 40-plus percent for the last year, with a remaining shortfall of "a percentage point or so" in SMF and weaker sections to be closed by the end of FY25.
The bank's borrowing cost, particularly from the HDFC Limited merger, was around 7-8%, with fully loaded costs at approximately 7.98%. The cost-to-income ratio remained stable at 40-41%, and the cost-to-assets ratio was a tight 1.93%. Management emphasized a disciplined approach to cost allocation and spending, aiming for greater efficiency. They also noted that the microfinance book constitutes less than 1% of the total book, performing well and remaining stable. The bank's loan mix is roughly 70% floating and 30% fixed, with about 45% of floating loans being repo-linked.
Looking ahead, HDFC Bank is confident in its robust positioning, with sufficient capital and liquidity to capitalize on market opportunities as macro conditions improve. They anticipate a "step-up" in sequential growth in FY26 and a further "step-up" in FY27. Management expects CASA ratios to improve and margins to pick up in the next couple of years as interest rates cool off and the economy moves northwards. The bank continues to focus on expanding customer relationships, having added 1.9 million liability relationships this quarter, bringing total customer relationships to 96.7 million.