HDFC Bank misses out on key factors in June quarter, stock under pressure

Slowdowns spare none. That’s the takeaway for investors in HDFC Bank from its June quarter (Q1) results, published over the weekend, even as the numbers largely met expectations.

This factor also weighed on the bank’s stock, which fell more than 3 per cent on Monday — the sharpest in reaction to the results.

But the larger question for investors is: How worried should they be? HDFC Bank’s position as market leader in private banking has so far shielded it from noticeable deceleration in loan growth or financial performance.

However, with the macro-economic outlook being far from comforting and affecting even the market leader, estimates may need to be reworked.

For one, net interest income (NII) growth of 23 per cent in Q1 lags the run rate of more than 25 per cent the bank has maintained in the past four years. While net profit growth at 21 per cent met expectations, a large part of it has been propped up by non-interest income, which is up by a faster pace of 30 per cent year-on-year. That said, sequentially net profit declined by 5.4 per cent, also the first time in about four years. 

The highlight of the quarter was elevated provisioning costs, which, at Rs 2,614 crore, rose by 60 per cent year-on-year. Given that loan growth at 17.1 per cent (a 12-quarter low), too, didn’t aid the bank as much, gross non-performing assets (NPA) continued to rise. Though still among the best in the industry, at 1.4 per cent, the rate rose seven basis points (bps) year-on-year in Q1, while the net NPA ratio at 0.43 per cent remained near about last year’s levels.

However, analysts at Kotak Institutional Equities have pointed out gross NPAs in retail are growing steadily, which implies that the best in the retail cycle may be over.

Also, slippages or loans turning bad rose to about 2 per cent of the total. With a sharp increase in slippages, analysts at Emkay Financial Global Services estimate FY20’s credit cost in the range of 100 basis points (bps).

These asset quality concerns may not go soon, given the concern over slowing economic growth and agricultural loans showing stress longer than anticipated. For investors, keeping a tab on unsecured loans may also be prudent. Having outpaced the rest of the segments in recent times, the bank’s pool of unsecured loans (largely personal loans and credit card) continued to grow faster than other loan segments even in Q1, up over 25 per cent year-on-year. The management has stated that considering the slowdown in consumption, the bank may go slow on this segment.

HDFC Bank said in general it has seen consumer leverage going up and the frequency of borrowing by consumers increasing — all early warning signals,” says Suresh Ganapathy of Macquarie Capital. However, unsecured loans are often the high-yielding segments and pruning growth could affect the net interest margin (NIM), which rose by about 10 basis points year-on-year to 4.3 per cent in Q1.

The other factor that could put pressure on the NIM is the decline in low-cost current account savings account (CASA) deposits. At a little over 39 per cent, CASA in Q1 is at a 12-quarter low and much of the deposit accretion is flowing in through retail term deposits, which tend to be 300-350 basis points more expensive than CASA deposits.

Analysts say this factor is affecting the cost of funds, which rose 28 basis points year-on-year in Q1 to 5.4 per cent.

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