The Q3 Market-Doom of HDFC

6 Minutes Read

The Indian indices- NIFTY, BankNIFTY and SENSEX saw a major dip today which was the worst since the COVID-19. This came after the Indian D-SIB, HDFC Bank announced the results for Q3 of the present FY 2023-24, it becoming the major (but not singlemost) factor dragging down the market. 

This comes just three days after the market and IT stocks hit All Time High (ATH) after Infosys and TCS announced their results. Now the point to note is that despite the fact that Infosys saw a 7.29% decrease YoY in profits, its share price grew by 7% intraday. 

On the contrary, HDFC bank reported a 33.5% jump in its net profit to ₹16,373 crore for the third quarter ended December 2023 from the same time last year. Despite that, the bank’s share fell by 8.4% and dragged down the broader market indices i.e. BankNifty (down 4.28%) and Nifty (down 2.09%).

Why such a non-intuitive market reaction in both the cases? Stock markets run on the expectations and deviation from expectations, rather than an economic perfect market structure where each stock is perfectly priced based on fundamentals. 

Let’s look at the report parameters, what they mean and their deviation from expectations:-

1. Net Profit: It is the amount of money the business earns after deducting all operating, interest and tax expenses over a given period of time. HDFC Bank, the first major lender to post results for Q3 of FY24, reported a net profit of Rs. 16,372 Crores higher than both analysts’ expectations of Rs. 15,651 Crores and its profit of Rs. 15,976 Crores in the previous quarter. However, it included a one-time tax rate gain. Nevertheless, this was not particularly a disappointing indicator.
2. Net Interest Income (NII): Net interest income is basically the difference between the interest received by the bank and the interest paid. Despite the fact that it rose about 4% Quarter-on-Quarter (QoQ) to Rs. 28,471 Crores, the market did not seem to be happy about it because it missed the expectations. According to a CNBC-TV18 poll estimate that took place before the release of results, HDFC’s NII was expected to record a growth of 6.2% QoQ while some analysts expected it to grow by 8%. 
3. Net Interest Margin (NIM): It is a measure of the difference between interest paid and interest received, adjusted for the total amount of interest-generating assets held by the bank. In short, net interest margin is one indicator of a bank’s profitability and growth. It reveals how much the bank is earning in interest on its loans compared to how much it is paying out in interest on deposits. The bank’s core NIM was 3.4% on total assets and 3.6% on interest-earning ones compared to 3.65% and 3.85%, respectively, in the previous quarter. The bank had to sell government securities to maintain its margin in the third quarter, leading to a dip in its liquidity coverage ratio.
4. Weak Deposit Growth: While deposits had reached Rs. 21.7 Lakh Crores with 14% rise Quarter-on-Quarter in the Q2 of this FY, it could reach Rs. 22.1 Lakh Crores by the end of Q3 i.e. just 1.9% rise QoQ. The retail deposits increased by 2.9%, while wholesale deposits declined 3.4%, QoQ. This further raised concerns about the future liquidity of the bank.
5. Capital Adequacy Ratio: It is capital-to-risk weighted assets ratio which indicates how well a bank can meet its obligations. As opposed to 19.5% in Q2, it saw a dip to 18.4% in the Quarter ending December 2023. However, it stood much higher than the RBI’s requirement of 11.7 percent for the bank under Basel III norms.
6. Provisioning Coverage Ratio: It is the percentage of funds that a bank sets aside for losses due to bad debts. A high PCR can be beneficial to banks to buffer themselves against losses if the NPAs start increasing faster. HDFC bank increased Provisions to Rs 4,216.6 crore in the Q3, up by 50% QoQ (including the contingent provisions, worth Rs 1,212 crore). This raises concern about the underlying gross NPAs of the bank that might show up in the coming quarters. Already, the gross NPAs of the bank stand at Rs. 31011.67 Cr as against Rs. 18763.90 Cr at the end of Q3 of 2022-23.

HDFC Bank is not just a D-SIB, but the bank with the largest weightage in stock indices. post While it constitutes 13.52% weightage of NIFTY50, it forms 29.39% of BankNIFTY and that is why, the singlemost event relating to the bank could have such a large impact even on the broader market indices. This is the result of the merger of HDFC and HDFC Bank, which makes the markets all the more vulnerable. But that is the tradeoff India cuts between vulnerability to the economy and having bigger banks to provide the support it needs for its growth.

While there was deviation from expectation and some underlying concerns, did it call for such a drastic impact on the stock and overall market? Well, with the euphoria of stock market investing and mutual fund SIPs with the ever increasing public participation, even a small disappointment becomes unacceptable to the investors. Is it fair? One can only ponder.