Stronger deposit base buoys HDFC Bank’s improving profits

Return on assets of 1.8% is higher than the 1.3% industry average.

Although its profitability declined post-merger with parent HDFC Limited, HDFC Bank is expected to see its profits rebound over the next few years as it strengthens its deposit base.

“Its profitability will improve over the next few years as it replaces high-cost wholesale funding with deposits and recoups the share of low-cost current and savings accounts in its total deposit base,” Moody’s Ratings said in a report, where it affirmed the India-based bank’s Baa3 long-term deposit ratings.

Moody’s said that HDFC Bank has a “stable” outlook on the back of its diversified loan portfolio, above-industry-average profitability, healthy net interest margin (NIM), diversified non-interest income, low credit costs, and higher-than-average return on assets.

HDFC Bank actually saw a decline in its profitability post-merger with HDFC Limited in 2023. This is due to HDFC Limited’s lower NIMs as a mortgage financier, lower asset yields, and higher funding costs.

Costs associated with meeting the Reserve Bank of India’s liquidity norms have also reduced its profitability.

On the upside, return on assets remain higher than the industry average: 1.8% as of March 2024, versus the industry average of 1.3%.

India’s favorable operating environment also offers HDFC Bank the opportunity to strengthen its market position, according to Moody’s.

“The bank's diversified loan portfolio and above-industry-average profitability will support its internal capital generation and strong solvency. In addition, its strong retail franchise, access to low-cost deposits and sufficient holdings of liquid government securities will support its funding and liquidity,” the ratings agency noted.

Asset quality is expected to remain broadly stable. HDFC Bank’s gross and net non-performing loan (NPL) ratios were 1.27% and 0.34%, respectively. This is lower than the systemwide gross NPL ratio of 2.8% as of 31 March 2024.

The bank is further expected to maintain its solvency, with a consolidated core equity tier 1 ratio of 16.1% as of the end of March 2024. 

“HDFC Bank's capitalization is the highest among the Indian banks we rate,” Moody’s said.

Funding and liquidity will also continue to be stable, with most of its funding coming from retail deposits, including low-cost current and savings account deposits. 

HDFC Bank's substantial holdings of government securities will also provide adequate liquidity buffers, according to Moody’s.

Earlier this year, HDFC Bank secured $500m in financing from the International Finance Corporation (IFC) to support lending to women in India.