HDFC Bank may see credit growth but its margins will continue to remain under pressure in Q1

Analysts expect HDFC Bank to fare better than other private sector peers in its first quarter earningsBCCL
  • HDFC Bank is likely to outperform its peer in first-quarter earnings result to be released on July 18 even as most banking earnings are expected to stay mute due to the impact of the coronavirus.
  • In the view of Reserve Bank of Moratorium on loan payment, asset quality may take a hit.
  • Margins are likely to remain under pressure due to due higher liquidity on the balance sheets and repo rate cuts.
HDFC Bank is expected to fare better than its peer as it lines up to fire its first-quarter earnings on July 18.

Analysts expect that while the banks will be bearing the impact of the coronavirus pandemic, large private banks — like HDFC Bank and Axis Bank — may report relatively better credit growth as compared to others.

“With single-digit moratorium indication and strong credit growth of 21% YoY, the bank remains one of the best templates,” said ICICI securities in its preview.


HDFC's credit growth in the last five quartersCompany filings/BI India

HDFC Bank’s sale of the stake in HDFC Life and the dividend from the uptake in its share price will help boost the bank’s income. “Banks with a relatively lower moratorium, higher contingent provision and secured retail portfolio including HDFC Bank and Axis Bank are seen reporting a steady performance,” ICICI Securities added.

HDFC Bank's share price over the last three monthsBSE/BI India

HDFC Bank’s Asset quality
HDFC Bank’s asset quality may be impacted with ICICI Securities estimating that it will be impacted by at least 10 basis points (bps) — 100 bps is equivalent to 1%. Gross non-performing assets

HDFC Bank's gross and net non-performing assets (NPAs) over the last five quartersCompany filings/BI India

Banks are expected to increase provision for bad loans to keep balance sheets strong. The metric to watch for will be the collection efficient trends to see if the proportion of loans under moratorium begin to decline gradually to assess the bank’s health believes Motilal Oswal.

The Yes Bank crisis was a blessing in disguise for HDFC bank with deposits rising and estimated to have grown at 25% in on a yearly basis in Q1FY20. “NII growth is seen at 18% YoY [year-on-year],” said ICICI Securities’ preview.


Analysts estimate that loan growth in retail will likely be moderate due to the impact of the coronavirus that has resulted in over discretionary consumer spending and muted wholesale lending trends.

Rate cuts push on margins

“Margin trajectory is likely to decline affected by the sharp cut in repo rate/MCLR across banks,” said Motilal Oswal. Last week, HDFC Bank cut its marginal cost of funds-based lending rate (MCLR rate) by 20 bps across all tenors. It used to indicate the lowest rate of interest that a bank can charge its lenders to encourage more people to take loans by making them cheaper. The MCLR applies to all kinds of loans — education, home, personal, easy loans and fast loans among others.

TenorNew MCLR (%)Old MCLR (%)
Overnight7.1 7.3
1 month7.157.35
3 months7.27.4
6 months7.37.5
1 year7.457.65
2 years7.557.75
3 years7.657.85


However, the bank’s margin is likely to remain under pressure due to MCLR cuts and more liquidity on the balance sheet.

“Moreover, declining interest rates along with higher liquidity on the balance sheets should keep margins under pressure,” said its report with an estimate of around 10 to 20 bps for private banks like HDFC Bank.

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