Shares of HDFC Bank fell over 4% to a low of Rs 1,653.70 on the BSE on Friday following a disappointing business update for the June quarter. This decline comes after a recent upward trend driven by expectations of an increased MSCI weightage.

In the first quarter, HDFC Bank's deposit growth was modest, increasing by 15.3% year-on-year but remaining flat sequentially. The Current Account Savings Account (CASA) ratio saw a 5% drop quarter-on-quarter, resulting in a decrease of about 190 basis points to 36%.

The bank reported that its loan book and deposits grew by 14.9% and 16.5% year-on-year, respectively, excluding the merger impact.

"Loan and deposit growth in Q1 are typically seasonally soft for HDFC Bank, usually showing 1-3% quarter-on-quarter growth in recent years. However, the current numbers are slightly lower than expected," said Nomura.

For the first time, the bank disclosed growth in average balances for deposits and assets under management (AUM) in its pre-Q1 update. Average deposits increased by 4.6% quarter-on-quarter, while average AUM grew by 0.8% quarter-on-quarter. This growth is partly due to a significant build-up in deposits at the end of the previous quarter (Q4), which typically sees higher inflows.

Nomura noted that the Q1 update indicates some moderation in the bank's core net interest margins (NIMs) on a quarter-on-quarter basis. HDFC Bank's NIM stood at 3.44% in Q4, still below the 4%+ levels of other large private banks.

Following today's decline, HDFC Bank shares have remained flat over the past year. The recent rally was driven by news of a potential increase in the bank's weightage in the MSCI Emerging Markets index. Nuvama predicts that HDFC Bank's weightage in the global index could double to 7.2%-7.5%, potentially attracting inflows of $3.2 billion to $4 billion.

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