Asset quality of HDFC Bank remains stable

This was reflected the bank's stock prices as well, which rose by 2.4%

The March quarter was yet another one in which the HDFC Bank outperformed the Street expectations on most parameters. The strong performance was reflected in the bank's stock prices as well, which rose by 2.4 per cent on an otherwise flat day of trade.

Its net interest income (NII) grew by 21.5 per cent year-on-year to Rs 9,055 crore. Net profit, which expanded by 18.3 per cent year-on-year to Rs 3,990 crore was ahead of Bloomberg estimates at Rs 3,950 crore. Net interest margin (NIM) was maintained at 4.3 per cent. The operational performance helped the bank overcome any possible asset quality slippages even as provisioning for bad loans doubled on a year-on-year basis to Rs 1,262 crore in Q4.

Spillover impact of the Reverse Bank of India's relaxation for loans less than Rs 1 crore in the December quarter resulted in provisioning being higher by Rs 100 crore in the March quarter. What also came handy was 19.4 per cent growth in the loan book, which currently stands at Rs 5.6 lakh crore. This padded up for the elevated provisioning containing the gross non-performing assets (NPA) ratio at 1.05 per cent. Though it has increased from 0.94 per cent a year ago, Paresh Sukthankar, deputy managing director, HDFC Bank, believes these levels are within the historic gross NPA ratio of 1.2-1.3 per cent. Investors, however, need to note that gross NPA levels have remained over a per cent since June 2016 quarter.

Net NPA ratio at 0.33 per cent is well within the range. While the loan growth is good, analysts are looking at the change in the loan mix for Q4. As against a 50:50 mix between retail and corporate loans traditionally maintained by the bank, the March quarter saw the proportion tilt towards retail loans with the loan mix at 53:47 (retail to corporate).

Ashutosh Kumar Mishra of Reliance Securities, highlights that the change in mix needs to be watched. "The loan mix in favour of retail so far has helped the bank maintain NIMs at over four per cent, an important factor justifying its valuations. If the mix changes it could affect the profitability," he cautioned.

Another noteworthy point was that the pace of loan growth for portfolios such as personal, home, business banking, Kisan gold cards, gold and two-wheelers have been slower than the overall retail loan growth. These loans account for about 47 per cent of the retail loan book.

The dip in term deposits growth at 7.9 per cent versus 22.9 per cent a year-ago also needs attention. A proportion of the current account saving account (CASA) to total deposits stood at 48 per cent in Q4, as against 43 per cent a year-ago. Sukthankar attributes the improvement in CASA to an increase in initial public offerings and dividends and adds that with most of the excess liquidity available with the bank being used up, the bank will increase its term deposits going forward.

While these were a few aspects to note from HDFC Bank's Q4 results, Alpesh Mehta of Motilal Oswal Securities believes that the bank's stock remains a buy as asset quality is one of the best in the industry.