HDFC Bank: Strong loan growth boosts Q4 show

The headquarters of India's HDFC bank is pictured in Mumbai, India
It was another quarter of steady performance by HDFC Bank. Net interest income (NII) at Rs 7,453 crore, which exceeded analysts’ estimates (Rs 7,250 crore), expanded 24 per cent year-on-year (y-o-y). Net profit (Rs 3,374 crore) grew 20 per cent y-o-y.

However, net interest margin (NIM) at 4.3 per cent hovered around the fourth quarter (Q4) of FY15 level of 4.4 per cent. Advances, which grew 27 per cent to Rs 4,64,594 crore, helped maintain stable NIM.

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“It is another quarter of strong numbers by HDFC Bank and higher loan growth helped NIMs remain stable,” said Shweta Mane-Daptardar of KRC Research.

But, there are a few points to take note of. For one, even if NIIs have expanded at a healthy clip, the growth of non-interest revenues (which accounts for 28 per cent of total revenues) and net profit remains soft on a quarter-on-quarter (sequential) basis.

Likewise, provision for bad loans has gone up from Rs 577 crore in Q4 of FY15 to Rs 662 crore in Q4’FY16. Paresh Sukthankar, deputy managing director of HDFC Bank, attributed the higher provisioning towards counter cyclical buffer (the capital reserves that banks need to build which may be utilised in times of economic or system-wide downturns) that was made in the March’16 quarter.

However, if one takes into account the gross non-performing assets (NPA) ratio, asset quality of HDFC Bank continues to remain robust. The gross NPA ratio at 0.94 per cent in Q4’FY16 was mirroring the performance of Q4’FY15 and has also been stable sequentially (0.97 per cent in Q3’FY16).

According to Daptardar, the strong quarter coupled with asset quality improvement defies the macro-economic challenges. Going forward, the loan growth is expected to remain intact in the retail (accounting for 51 per cent of total loan book) and wholesale (corporate) segments and both are gaining market share, with the latter outpacing the former.

While the personal loans segment has grown faster than the rest in the retail loans basket, loans to emerging corporate groups are fast catching up to keep the wholesale lending business buoyant. After Q4’FY16, the investment faith in HDFC Bank appears to have risen. Rahul Shah of Motilal Oswal Securities says: “We continue to recommend HDFC Bank as a 20 per cent compounding machine with retail focus and, hence, a key play on rising consumerism in India.”

Siddharth Purohit of Angel Broking adds the current earnings trajectory of 20 per cent y-o-y growth is strong and justifies a premium valuation multiple. HDFC Bank trades at FY17 price-to-book value of 3.27 times according to Bloomberg.

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