Investors should not be gung-ho about banks' Q1 headline numbers: Analysts

While Q1 updates of HDFC Bank, IndusInd Bank and Federal Bank show up to 21% loan growth, extension of moratorium, postponement of March disbursements will influence reported numbers

The June 2020 quarter (Q1) updates of three private banks – HDFC Bank, IndusInd Bank and Federal Bank – announced in the last 2-3 days enthused the Street on Monday. With around 2-4 per cent gains in the stock prices, these three banks topped the Nifty Bank index, which was up about two per cent on Monday.

As per Q1 updates, HDFC Bank continued its strong momentum with 21-25 per cent year-on-year growth in loans and deposits. While, IndusInd Bank and Federal Bank’s loan growth continues to remain moderated in Q1. But, given the sever disruptions in Q1 led by Covid-19, the Street’s positive reaction to these numbers is justifiable. However, some experts/analysts believe that these headline numbers may not narrate the actual story.

“As with the previous quarter, the extension of moratorium on loan repayment implies that the headline earnings print does not reflect the current status of the business-at-hand. As discussed in the previous quarter, we are less inclined to give importance to the reported earnings of banks for 1HFY21 (April-September 2020),” analysts at Kotak Institutional Equities said in their report.

Many banks have over 25 per cent of their loan book under moratorium in Q4. The extension of 3-month moratorium till August, would not only result in lower reported non-performing assets or bad loans but also inflate the outstanding loan amount to some extent due to lower repayments. The above quoted report of Kotak Institutional Equities also highlighted that, “there is also an element of capitalization of interest reflecting in overall loan growth numbers.” Interest capitalisation is addition of unpaid interest in the principal loan balance when repayments are deferred. Analysts expect disbursements to decline in Q1, although moratorium book is expected to moderate.

Further, an expert from a rating agency also believes that given operational disturbance led by lockdown in March, which is a crucial month for banks in terms of business growth, some loan disbursements could have got pushed in June quarter. In fact, Nitin Aggarwal, analyst at Motilal Oswal opines that as half of the Q1 period was under lockdown, how the moratorium book has panned out in Q1 is a key thing to watch out rather than overall business growth.

Nonetheless, HDFC Bank’s 21 per cent loan growth in Q1 is despite lower moratorium (low single digit in Q4) and it clearly indicates the bank’s strong market position. Yet, succession of its chief executive officer, Aditya Puri, who will be retiring in October this year would be a crucial event for the stock.