At multi-quarter low, HDFC Bank's retail loan growth may face more pain

A few weeks ago, when HDFC Bank published its December quarter (Q3) loan growth and deposit data, analysts were of the opinion that the widespread economic downturn wasn’t hurting it much. This was tested over the weekend, when HDFC Bank published its Q3 results. 

While headline numbers met estimates, quality of loan growth and asset quality didn’t. This explains the 1.8 per cent dip in its stock price on Monday.

Net interest income (NII) growth, at 12.7 per cent year-on-year (YoY), is the weakest in 15 quarters. 

HDFC Bank’s yield on assets fell from 9.3 per cent a year ago to 8.9 per cent in Q3.

More importantly, much of the 20 per cent YoY loan growth was driven by corporate loans (up 37 per cent led by working capital loans and demand from state-run companies). However, pricing power in such loans is relatively lower as compared to retail loans, which grew by just 14.2 per cent.

Barring personal loans and credit cards, which grew 23 per cent and 28 per cent (YoY in Q3), respectively, other pockets such as agri, gold and business banking loans grew well below the 15 per cent mark.

So, while HDFC Bank may be making headway in consumer loans through its credit cards and personal loans, other segments may take a while to rebound. 

Of the lot, vehicle loans posted the weakest growth numbers (1.3 per cent) and fell below even Q2’s five per cent growth rate, indicating that the festive season didn’t help. Analysts say that unless there is a recovery in the economy, HDFC Bank’s retail loan growth could face more pain. It was at a multi-quarter low in Q3.

Equally disappointing was asset quality. While gross non-performing assets (NPA) ratio didn’t change much – 1.4 per cent in Q3 – and was maintained at a year-ago and Q2 levels, the problem was that slippages or loans turned bad and stood at Rs 5,340 crore. 

This pushed up the slippages ratio to 2.3 per cent, which is also a multi-year high for the bank. Trouble from corporate and agri-loan exposures kept the number elevated and accounted for 28 per cent of the total slippages. 

Analysts at Kotak Institutional Equities noted that higher credit costs and slippages in recent years reflect the changing loan mix of the bank.

With two main aspects (NII and asset quality) challenged, Q3 may be one of the few quarters where fewer analysts increased their expectation from the stock.

While there is no reason to turn cautious yet, investors should moderate their near-term expectations.

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