HDFC Bank's weak Q1 performance may keep Bank Nifty under pressure

The private bank bellwether reported its lowest NII growth in a decade

The Q1 results of HDFC Bank disappointed and sent tremors through the private banking space. HDFC Bank, among the most highly-valued institutions in the world, recorded its lowest growth in Net Interest Income (NII) in at least ten years. It also saw rising non performing assets (NPAs), and higher write offs, and in a show of caution, boosted provisioning and contingency reserves. The subsidiary, HDB Financial, took a hit with elevated NPAs as well.

Much of this was the effect of the Second Wave. The bank believes robust high-speed indicators signal strong growth through the rest of 2021-22. It is pegging the likely inflation rate at 6 per cent for the fiscal. The MSME sector showed some signs of recovery.

Other private banks are also likely to see a trend of elevated slippages and may have to create larger buffers and accept higher provisioning. Lower NII growth and lower Net Interest Margins (NIM) are likely across the banking space. The credit-deposit ratio could see moderation.  Given the current trends in inflation and interest rates, banks cannot rely on further cuts in deposit rates, which means the cost of funds will not go much lower and treasury income will fall.  

The Q1, 2020-21 was terrible, so there is a favourable base effect. However on QoQ sequential basis, the Q1 2021-22 was poor compared to Q4, 2020-21.  Earnings growth of 16 per cent was lower than the long-term average of better than 18 per cent. NII dropped to single digits, for the first time in at least 10 years, while the NIM dropped to 4.1 per cent.

Year-on-year NII growth was at 8.6 per cent while it was negative QoQ. Fee-based income was down 23 per cent QoQ with Second Wave disruptions leading to lower card spends, retail loans, etc. Treasury gains also slowed as the bond market saw lower activity and no more rate cuts are expected.

Total net income was up 18 per cent YoY and down 6 per cent QoQ.  The bank sold off Rs 1,800 crore worth of NPAs and took Rs 3,100 crore of write-offs to stabilise gross NPAs at 1.47 per cent (from 1.3 per cent in 2020-21). PAT was up 16 per cent YoY, and down 5.6 per cent QoQ.

Gross non performing loans (NPLs) rose by 24 per cent YoY and 13.3 per cent QoQ. The coverage ratio of 68 per cent was lower YoY (76 per cent in Q1, 2020-21) and lower QoQ (70 per cent in Q4, 2020-21). Collections and recoveries were hindered by the Second Wave.

The retail portfolio did show improved growth at 10 per cent, YoY versus single digit growth over the past four quarters. But this could moderate due to the low base effect wearing off. Sequential growth was marginally negative. HDFC Securities reported good numbers, with revenue up 67 per cent YoY while PAT grew by 95 per cent which compensated to some extent for the stress in HDB Financials.  

Most analysts continue to maintain a “Buy” rating on HDFC Bank projecting upsides of roughly 25 per cent from current share price in the next 12 months.  However, the bank is a bellwether and we’re likely to see similar bearish trading trends in other private banks. The Bank Nifty lost almost 2 per cent today, and this could be the start of a deeper correction unless other banks deliver positive surprises.