Investors advised caution, shouldn't be gung-ho about banks' Q1 updates

Many banks have over 25 per cent of their loan book under moratorium in Q4
The June quarter (Q1) updates of three private banks — HDFC Bank, IndusInd Bank, and Federal Bank — announced in the last few days enthused investors on Monday. With 2-3 per cent gains in stock prices, HDFC Bank and IndusInd Bank were among the top gainers on the Nifty Bank Index, which was up 1.6 per cent on Monday, while Federal Bank was up 1.4 per cent.

HDFC Bank continued its strong momentum with 21-25 per cent year-on-year growth in loans and deposits. However, while IndusInd Bank and Federal Bank’s deposits also grew, their loan growth fell further in the first quarter.

Given the severe disruptions in Q1, led by the Covid-19 pandemic, the Street may be partly justified in reacting positively to these numbers. However, some experts believe these headline numbers may not narrate the real story.
“As with the previous quarter, the extension of moratorium on loan repayment implies that the headline earnings print does not reflect the current status of the business at hand. As discussed in the previous quarter, we are less inclined to give importance to the reported earnings of banks for H1FY21 (April-September 2020),” analysts at Kotak Institutional Equities said in their report.

 

 
Many banks have over 25 per cent of their loan book under moratorium in Q4. The extension of moratorium till end-August would not only result in lower reported non-performing assets or bad loans, but also partly inflate the outstanding loan amount due to lower repayments.

Kotak Institutional Equities highlights: “There is also an element of capitalisation of interest reflecting in the overall loan growth numbers.” Interest capitalisation is the addition of unpaid interest to the principal loan balance when repayments are deferred.
While the trend in the share of low-cost deposits (CASA ratio) was mixed, banks haven’t shared details on the disbursement and moratorium, which analysts expect to have declined in Q1.
But, here’s a word of caution. A rating agency executive says, given the operational disturbance led by the lockdown in March — a crucial month for banks’ business growth — some loan disbursements could have got pushed to the June quarter, thereby inflating the numbers.

Nitin Aggarwal, analyst at Motilal Oswal Securities, opines that as half the Q1 period was under lockdown, it is more important to see how the moratorium book has panned out in Q1.

 
Moreover, HDFC Bank’s 21-per cent loan growth in Q1 appears impressive, indicating its strong market position. The succession of its Chief Executive Officer Aditya Puri, who retires in October, however, will be a crucial event for the stock.


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