HDFC, ICICI Bank Q2 earnings preview: deposit surge, margin pressure in focus

Mumbai: HDFC Bank and ICICI Bank, India’s two largest private sector banks, are likely to face a similar challenge in the September quarter – sustaining loan growth without sacrificing margins as deposit costs rise, according to three brokerages

When the two lenders report their Q2 earnings on Saturday, investors will closely track their net interest margins (NIMs), credit costs and management commentary on growth. Robust deposit mobilisation led by robust foreign currency non-resident bank or FCNR(B) deposits and resilient asset quality are expected to support the performance of the banks.

For HDFC Bank, the focus will be on the execution by the new management, the impact of FCNR(B) deposits, and translating improved operating efficiency into stronger profitability.

ICICI Bank, meanwhile, is expected to report healthy business growth, although a surge in FCNR(B) deposits could weigh on margins in the near term.

According to Bloomberg’s estimates, HDFC Bank is expected to post a net profit of ₹21,108 crore, up 13% on year and 10% on quarter. This is likely to be driven by strong loan growth, supported by corporate and small and medium enterprise lending, and by deposit growth.

Provisional data shared with the exchanges showed that HDFC Bank’s gross advances grew 16.3% year-on-year in the September quarter, while deposits rose 18.8%. The bank mobilized $11.5 billion in FCNR(B) deposits, against which its overseas branches extended $5.7 billion in loans. However, its current account and savings account (CASA) ratio fell around 70 basis points sequentially to 31.6%, highlighting pressure on its low-cost deposit mix.

"The headline reported numbers on loan growth is marginally lower than industry average. Credit to deposit (CD) ratio was stable on a period-ending basis at 95% led as impact of FCNR deposits has been lower. Deposits grew 19% on year. We are building NIM (net interest margins) to remain stable or marginally decline this quarter,” Kotak Institutional Equities said in a report on HDFC Bank.

For the quarter ended June, the bank’s NIM was 3.26%, lower than 3.4% a quarter ago. Motilal Oswal Financial Services expects margins to moderate by eight basis points in the September quarter. Yes Securities also expects sequential margin pressure as deposit costs rise faster than yields on advances.

Analysts expect asset quality to remain contained at around 45-50 bps. “We expect the gross NPL (non-performing loan ratio) to be stable with slippages at 1.2% of loans. Near-term focus would be the progress of NIM (NIM to improve slower-than-expected), impact of FCNR deposits and execution under the new management,” Kotak said.

Earlier this month, RBI approved the appointment of Anup Bagchi as the new managing director and chief executive officer of HDFC Bank for a three-year term starting 27 October, succeeding Sashidhar Jagdishan, whose term ends on 26 October.

“The appointment of Mr. Bagchi removes a key overhang surrounding HDFC Bank's leadership succession and brings an external perspective at a time when the bank is seeking to rebuild investor confidence,” Motilal Oswal had said in a report, adding that a new leadership team, alongside an improvement in growth and earnings trajectory, should improve investor sentiment.

ICICI Bank

ICICI Bank is expected to deliver stronger headline loan growth, aided by FCNR(B) inflows, even as the resulting funding mix puts pressure on margins.

Motilal Oswal has pegged the bank’s loan growth at 26% year-on-year and 9% quarter-on-quarter, while deposits are expected to rise over 25% on year and 10% sequentially. The brokerage expects the bank’s net profit to rise 19% on year to ₹14,648 crore. In the previous quarter, its bottomline was at ₹14,805 crore.

Kotak Institutional Equities expects around 15% on year growth in pre-provision operating profit, supported by healthy revenue growth. However, it expects the bank’s NIMs to decline by 15 bps sequentially to 3.8%, primarily because of FCNR(B) deposits raised during the quarter.

For the quarter ended June, the bank’s NIM was at 4.36% against 4.32% a quarter ago.

Motilal Oswal also expects a 20-bps sequential fall in NIMs, citing the higher leverage component of FCNR(B) inflows.

Asset quality is expected to remain resilient. Kotak estimates credit costs at around 0.4%, with slippages at approximately 1.5% of loans, and does not anticipate fresh negative surprises on provisions. Motilal Oswal expects a marginal sequential increase in provisioning due to higher standard asset requirements on the leveraged portion of FCNR(B) inflows.