Banks continue to spook markets after HDFC Bank’s LDR shock in Q3

• HDFC Bank’s loan to deposit ratio (LDR) went up to a tight 110% versus its pre-merger LDR of around 85%.
• There is chatter that the RBI intends to bring LDR to around 75%, which may stress other banks as well.
• If it happens, margins will be stressed, and cause aggressive deposit mobilization that will cause de-rating of the sector, say analysts.
  

HDFC Bank opened 2.5% lower on Thursday, after a sharp 9% plunge on Wednesday as its third quarter earnings report shocked the street. The bank, which reported its second earnings report after merger with parent HDFC, saw its loan to deposit ratio (LDR) go up to a tight 110%.

Its pre-merger LDR was anywhere between 85-89%. The Reserve Bank of India is generally comfortable if banks maintain their LDRs between 70-75%. By this, India’s largest private bank will have the highest LDR. The market fears that it might not be the only one.

“HDFC Bank results showed heightened levels of credit/deposit (CD) ratio beyond RBI’s comfort levels. This is the case with most other banks as well. Thus, the markets expect either margin pressure, in case banks go in for aggressive deposit mobilization, a slowdown in lending growth, or both. This development can lead to some de-rating of the sector,” said Naveen Kulkarni, chief investment officer at Axis Securities.

As of Thursday morning, Bank Nifty slipped by 0.8% or 384 points. Eight out of 12 of the banking index’s constituents opened in the red with Federal Bank, PNB and IndusInd Bank falling over 1%.

The stress of deposit growth

HDFC Bank, analysts say, will have to grow its deposit growth rate at 3-4% higher than credit growth to help improve its LDR to pre-merger levels.

In the third quarter, its gross loan growth came in at 4.9% sequentially, while deposits grew at 1.9%. The management said that it plans to bring it back, but it will happen over 3-4 years.

“Management has been replacing non-retail deposits with retail to granularize the deposit base and avoid the fiercer price competition in the non-retail space. System liquidity also declined in Q3 which led to more intense market deposit competition that the bank had chosen not to participate in,” said a report by CreditSights.

In the meanwhile it has plans to grow its unsecured loans in the range of high-teens in spite of RBI’s recent crackdown as they now make up for 22% of its loan book, after the merger.

To be able to chase this growth without a fast ramp up in deposit growth, might stress net interest margins (NIMs). They came in flat for the quarter.

“The lower liquidity coverage ratio (LCR) and slower deposit growth may limit net interest margin NIM expansion going forward. The reported NIMs of 3.6% (for interest earning assets) came below expectations. The lower LCR, CDR bottleneck and slower deposit growth may squeeze NIMs going forward,” said Ajit Kabi, research analyst at LKP Securities.