HDFC Bank changes its growth track

Wholesale loans accounted for 46% of total, with retail accounting for the rest

HDFC Bank has been among the top BSE Sensex performer, with year-to-date gains of 45 per cent. However, after scaling to its 52-week high of Rs 1,810 on August 1, the stock has pared some gains to now trade at Rs 1,754.

The decline may be attributed to weak market conditions seen in the past few weeks. June quarter results, which threw up some asset quality issues, particularly on the agriculture loans front, has prompted some analysts to increase their credit cost estimates. Jefferies has upped its credit cost guidance 18 basis points (bps) for FY18, while UBS has raised it by 10 per cent to 82 bps, to factor in higher delinquencies in the farm and small business segments. For a bank that hasn't seen much credit cost adjustment, this is perhaps a first in recent times. It needs to be seen how HDFC Bank's recent announcement on increasing its market share in wholesale loans (mainly through refinancing loans) would impact its growth, asset quality and profitability. Wholesale loans accounted for 46 per cent of total, with retail accounting for the rest.

Refinancing refers to bringing in a new loan as replacement. It allow the borrower to avail lower interest rate and sometimes longer repayment term. Such loans, however, entail risks of asset quality and yields. A recent note by CRISIL mentions that almost three-fourths of the outstanding ratings are in the BB or lower categories. "Consequently, the median rating stayed put at 'CRISIL BB' category, lower than the 'CRISIL AA' category median as on March 31, 2008," the note adds. With far fewer highly-rated corporates, it needs to be seen how HDFC Bank would maintain its asset quality in such challenging times.

Most corporate-facing banks such as ICICI Bank, State Bank of India, Punjab National Bank and Axis Bank, which until a few quarters ago saw decent growth in their corporate book due to refinancing possibilities, saw the window shrink in June '17 quarter with fewer viable opportunities. The fact that the capex cycle is yet to pick up and credit growth is weak tells the story. However, Kaizad Bharucha, executive director, HDFC Bank, reiterates the bank does not face capital constraints. "This gives us excellent refinance opportunities and a chance to acquire good assets."

The Street, however, will closely observe how the new strategy on wholesale lending pans out in terms of maintaining the bank's net interest margin, at over four per cent. As refinancing loans usually result in lower yields, change in the bank's profitability could also have a direct implication on its valuations. Analysts have long defended HDFC Bank's expensive valuations, now at 4.6x FY18 price-to-book value, for its ability to sustain profitable growth and high asset quality. Asutosh Mishra of Reliance Securities says given the bank's track record, sustaining the momentum should not be an issue, though the Street would keep a close tab on its asset quality.