Deposit growth, asset quality trend key concerns for HDFC Bank

Stock movement more of a reflection to KKR's stake sale, say analysts

The HDFC Bank stock corrected by over 2 per cent after global investment firm KKR sold shares of the bank at a price band of Rs 2,219-2,287. At the lower end, this works to about 3 per cent discount to Tuesday’s closing price of Rs 2,287 apiece. Therefore, experts say Wednesday’s stock action seen with respect to HDFC Bank was more of a reflection to KKR’s sale price.  

Meanwhile, the bank is also in the process of raising Rs 50,000 crore of capital through a mix of debt instruments, over the next 12 months. While details of the fund infusion aren’t known, analysts say the same will be closely watched, given the debt market is turning expensive globally. There are other moving parts for investors to keep track of, in the coming quarters (particularly the March quarter; Q4), given how important it has been historically for the bank to gauge its deposit and loan growth strength.

The recently published data on these parameters indicate that with an advances base of Rs 8.19 trillion as on March 31, 2019, loan growth is still not an issue for the bank. 

On a sequential and year-on-year (YoY) basis, its Q4 numbers are ahead of the respective benchmarks. However, what needs to be watched is the rising share of unsecured loans, something that stood out in Q3. Largely comprising personal loans and credit cards, the two segments expanded by over 30 per cent each, taking their share in the total loan portfolio to 17 per cent — an all-time high for these segments. 

Consequently, the share of risk-weighted assets to total assets at 81 per cent is among the highest in the sector, say Ambit Capital analysts. 

This apart, an important monitorable is deposit growth. With Rs 9.23 trillion mobilised in Q4, the amount was marginally lower than the bank’s sequential and YoY growth rates. At 8.3 per cent YoY growth in Q4, it lags the previous year’s run rate (over 12 per cent). Even sequentially, a growth rate of 8.3 per cent lags the 10-12 per cent sequential growth rate achieved in the past. For investors paying top dollar to lap up HDFC Bank shares, asset quality holds key. From a sub-1 per cent level, the number has seen a steady increase over the last few quarters. 

While a gross non-performing assets ratio of 1.38 per cent in Q3 compares well against other private banks, it marginally breaches — on a stand-alone basis —the 10-year historic gross NPA average of 1.3 per cent. Much of the pain is from agricultural loans that have been under stress following waivers announced by various state governments. Analysts at Kotak say that as agriculture loans remain a key concern given they contribute a higher share to slippages, there is likely to be a more cautious approach during the election period. 

Nonetheless, for investors, with HDFC Bank continuing to hold pole position, the Street isn’t attributing much downside risks to these factors. While they remain important monitorables, 51 out of 55 analysts polled on Bloomberg retain a ‘buy’ recommendation on the stock, despite expensive valuations of 4x its FY20 book.