HDFC Bank's stock bounces, after suffering worst 2-day selloff in 4 years

By Tomi Kilgore

Investors expressed concerns over falling net interest margin, weaker deposit growth after earnings

Shares of HDFC Bank Ltd. bounced Thursday, after disappointment over net interest margins and weaker deposit growth had sent them to their worst two-day performance in nearly four years.

Bernstein analyst Pranav Gundlapalle noted that when HDFC reported fiscal second-quarter results in October, the Mumbai, India-based bank had blamed incremental cash-reserve requirements (ICCR) and excess liquidity for the sharp drop in net interest margin.

But for the third quarter, "despite the absence of ICCR requirements and decline in excess liquidity," the bank reported NIM that was flat versus the second quarter, Gundlapalle said.

HDFC's U.S.-listed stock (HDB) rose 1.9% in premarket trading Thursday.

On Tuesday, after the results were reported, the stock had dropped 6.7%, then tumbled 9.1% on Wednesday, the biggest one-day drop since March 2020, to close at an 18-month low.

The two-day drop of 15.2% was the worst two-day performance since it tumbled 17.6% over the two days ended March 23, 2020.

The bank reported on Tuesday third-quarter core NIM of 3.4% on total assets, compared with reported NIM of 3.4% in the second quarter, and well below the 4.1% reported in the same period a year ago.

Net interest margin is the difference between what the bank generates from assets, such loans, and what it pays out on liabilities, like deposits.

Gundlapalle said his biggest concern is what caused the NIM "surprise," as well as weaker deposit growth, and the lack of a clear path to normalization.

"Specifically, it is unclear if the NIM surprise was: (1) A result of a systemwide increase in cost of funds; or (2) A consequence of choosing expensive liability sources," Gundlapalle wrote in a note to clients.

He also worried that continued weak deposit growth could limit loan growth, and eat further into margins, which would in turn lead to reduced earnings growth.

HDFC reported third-quarter deposits that rose about 2% from the second quarter, and nearly 28% from a year ago.

Meanwhile, Gundlapalle reiterated his outperform rating on HDFC's stock, citing confidence in the bank's ability to "eventually see an improvement in its operating metrics." His stock price target implied 34.5% upside from the latest closing price in India trading.

The U.S.-listed stock has slipped 3.2% over the past three months through Wednesday, and has tumbled 19% over the past 12 months. In comparison, the iShares India MSCI ETF INDA has climbed 15% over the past year and the S&P 500 index SPX has advanced 20.6%.

-Tomi Kilgore

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01-18-24 0837ET

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