HDFC: Moderate NII growth a temporary blip

March quarter earnings aided by profit on sale of investments and lower tax rate

HDFC’s stand-alone results for the quarter ending March 2015 were higher than expected, but there are a few areas that investors might want to look at closely.

While reported net profit of Rs 1,862 crore was up 8.1 per cent year-on-year, adjusting for the impact of Deferred Tax Liability on Special Reserve, net profit was up 15 per cent y-o-y at Rs 1,982 crore, nine per cent higher than Bloomberg consensus estimate of Rs 1,820 crore.

A closer look at the numbers, however, reveals a few weak spots. First, a large part of bottom line growth came in from an increase in non-lending items. While dividend income was up 95.2 per cent y-o-y to Rs 179 crore, it is largely recurring in nature. However, profit on sale of investments contributed to profit growth, given that it was up 76.4 per cent to Rs 225 crore. Besides, a 148 basis points fall in tax rate to 25.2 per cent, too, added to profit growth.

Secondly, the net interest income (NII) growth moderated in the quarter. Notably, there is a difference in the NII growth number calculated by the management and analysts. While HDFC management says NII (including dividend income) stood at Rs 2,534 crore, up 13.5 per cent year-on-year, analysts at CLSA estimate it at Rs 2,355 crore, up 10 per cent year-on-year. Even then, the growth was among the lowest in the past few quarters.

Vaibhav Agrawal, vice-president research – banking at Angel Broking, says: “HDFC’s NII of Rs 2,461 crore is lower than expected and has been slowing down since last two quarters.”

He believes it could be due to the balance sheet growth slowing down, higher amount of loans sold to HDFC Bank and, more importantly, due to intensifying competition particularly from banks in the home loan segment. However, most analysts are not worried, and believe the moderation is more likely to be a blip.

“NII growth was at a modest level of 10 per cent y-o-y, but we expect this to improve with healthy loan growth and rise in share of higher yielding corporate loans and decline in cost of borrowings,” write CLSA’s analysts.

The fact that loan growth continues at a good pace provides confidence. HDFC witnessed an uptick in non-individual loans (30 per cent of loan book), which grew 14 per cent y-o-y (including loans sold). Individual loans continued to grow at a healthy pace and increased 23 per cent, taking the overall loan growth to 20 per cent. A large part of growth is coming in from peripheral areas of cities such as Mumbai, Delhi, Bangalore, Pune and Chennai in the individual segment.

"We believe our individual loans can grow 15-20% over the next 3-5 years after adding back loans sold. We hope non individual loan growth improves as and when investment cycle increases", said Keki Mistry, vice chairman & CEO, HDFC.

If corporate growth improves going forward, it will further aid profitability given that it is a more profitable segment albeit carrying higher risk. HDFC's spreads as well as asset quality trends remained healthy in the quarter.