HDFC Bank keeps up 20% net growth

Gross NPA ratio rises a bit, but below those of peers; lower provisions for bad loans help sustain profit record

Maintaining non-performing assets (NPA) at relatively low levels has historically been the stronghold of HDFC Bank. Though results for December 2015 quarter (Q3) did keep up with this practice, gross NPAs were up 11 per cent sequentially, almost twice the pace of growth in net interest income. Gross NPA ratio (as percentage to gross advances) thus climbed from 0.91 per cent in Q2FY16 to 0.97 per cent, indicating some pressure on asset quality.

Although the management sounded confident and analysts are not worried, one reason for the higher net NPA ratio (up four basis points (bps) to 0.29 per cent sequentially) is the decline in provisions for bad loans to Rs 654 crore in Q3 from Rs 681 crore in September 2015 quarter.

Having said that, NPAs are still far from levels that would concern the Street and much lower than 1.7-2.7 per cent of peers. With the business of HDFC Bank continuing to be skewed towards retail loans (53 per cent of advances), it hedges the bank to some extent from asset quality concerns predominantly felt in corporate/project loans.

Overall, Q3FY16 was yet another quarter of strong show. With operating expenses flat on a sequential basis and up marginally year-on-year, the bank curtailed its costs. Net profit was up 20.1 per cent year-on-year to Rs 3,357 crore, led by 24 per cent increase in NII (Net Interest Income) at Rs 7,069 crore and partly due to doubling of trading profits to Rs 328 crore. Had it not been for higher trading profits and lower bad loan provisioning (up 16 per cent year-on-year), HDFC Bank's net profit may not have grown by over 20 per cent year-on-year, a trend seen for the past 10 quarters at least.

Much of the advances growth of 26 per cent (Rs 4,36,364 crore) was driven by retail loans (up 30 per cent) while wholesale loans grew 21 per cent year-on-year. But going forward, its management is cautiously optimistic about high growth in retail business, given the high base. With in-line results, HDFC Bank shares gained 0.94 per cent on Monday. Given its superior track record, one can hope its stock's outperformance will continue.