HDFC Bank's Q1 net rises 18% to Rs 46 billion but misses estimates

Private lender HDFC Bank on Saturday reported an 18.2 per cent year-on-year increase in net profit to Rs 46.01 billion for the June 2018 quarter (Q1), missing estimates of Rs 47.41 billion (as per a Bloomberg poll of analysts). The sub-20 per cent profit growth comes after a gap of four quarters.

 
Mark to market (MTM) loss of Rs 3.91 billion was the key reason for the profit being lower than street estimates. “The MTM loss was primarily attributable to the corporate bond portfolio,” said the bank in a statement. The pain would have been lower had the bank chosen to spread such losses equally over four quarters. The Reserve Bank of India (RBI) has given an option to banks to spread the MTM loss on investments held in available for sale (AFS) and held for trading (HFT) categories equally in four quarters, but HDFC Bank recognised the entire loss in Q1.

 
Besides, a loss on revaluation/sale of investments of Rs 2.83 billion, against a Rs 3.31 billion gain in the year-ago quarter, impacted the bank’s net profit further.

 
Total income grew 18.8 per cent to Rs 263.67 billion in Q1 from Rs 221.85 billion in the June 2017 quarter. Net interest income (NII), which is interest earned less interest expended, for the quarter, grew 15.4 per cent to Rs 108.14 billion, from Rs 93.71 billion a year ago. It was driven by asset growth and a net interest margin (NIM, NII divided by average interest-earning assets) of 4.2 per cent for the quarter, said the bank. The domestic loan mix between retail and wholesale stood at 55 per cent and 45 per cent, respectively.

 
The NII growth, however, was the lowest since March 2014 quarter and NIM saw a contraction during the period as against 4.3 per cent in previous quarter and 4.4 per cent in year-ago quarter. Lower share of low-cost current and savings accounts (CASA) and an increase in fresh slippages (loan accounts turning bad) restricted the improvement in these key indicators.
The bank’s CASA share, in Q1, was at 41.7 per cent of its total deposits versus 43.5 per cent in the March 2018 quarter and 44 per cent a year back.

 
Importantly, the bank reported a 14 per cent year-on-year and 27 per cent sequential rise in fresh slippages during the quarter under review. Due to fresh slippages, banks have to reverse the interest earned on such defaulted accounts, which lowers their core income and profitability. “Large part of fresh slippages came from agriculture portfolio. The bank has been experiencing a pressure from this pack of advances since the past two quarters,” says Asutosh Kumar Misra, analyst at Reliance Securities.
Consequently, asset quality deteriorated, albeit marginally, both on a year-on-year and sequential basis. Gross non-performing assets (NPAs) as a percentage of gross advances stood at 1.33 per cent as on June 30, 2018, compared to 1.30 per cent as on March 31, 2018, and 1.24 per cent as on June 30, 2017. Though the reported gross NPA figure is not worrisome and still among the best in the industry, analysts are cautious about the asset quality trend of the bank as gross NPAs have been moving up since the past five-six quarters. Gross NPA stood at 1.0 per cent at the end of September 2016. Net NPA ratio was down three basis points year-on-year, but up one basis point sequentially, at 0.41 per cent in Q1.

 
Another analyst with a domestic brokerage, on condition of anonymity, said: “We are cautious due to the increasing share of unsecured loans as losses due to default by such loan accounts are higher. Though higher spread on such loans would help the bank make over for loan losses, interest reversal on their default would impact its earnings.” According to the bank’s FY18 annual report, proportion of unsecured loans moved up by 154 basis points, year-on-year, to about 26 per cent as of March 2018.

 
Though analysts remain positive on the stock which figures among their top picks, due to asset quality pressure in the June 2018 quarter a few expect some pressure on the stock in Monday’s trade.

 
Meanwhile, the bank’s total Capital Adequacy Ratio (CAR) stood at 14.6 per cent as on June 30, 2018 against 15.6 per cent as on June 30, 2017.  Earlier this month, HDFC Bank raised Rs 85 billion by issuing over 390 million shares to its parent HDFC, which should further shore up the figure.

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