HDFC Bank puts up a decent show

Falling margin may set off tweaks to profit estimates

A leader among private banks, with a bias towards retail (consumer) lending, HDFC Bank was expected to post muted December quarter (Q3) results, in the wake of note ban. However, net interest income (NII) at Rs 8,309 crore (up 17.6 per cent year on year), and non-interest income at Rs 3,142 crore (up 27.4 per cent year on year) helped net revenue grow 15.2 per cent at Rs 11,452 crore in Q3. Net profit (Rs 3,865 crore) expanded 15 per cent year on year in Q3. These numbers came slightly ahead of estimates and helped HDFC Bank stock close higher by 1.8 per cent on Tuesday.

That said, HDFC Bank’s Q3 results saw the slowest quarterly growth in business in recent years, suggesting it may take a while before numbers normalise. Also, it was the first time net profit grew below 20 per cent year on year for the bank, and was its lowest profit growth ever. So, investors will have to rethink their expectations going ahead.

Consider this: The bank’s loan book grew to Rs 4,95,043 crore, up 13.4 per cent year on year, while sequentially, it was flat. Pressures in corporate lending, which have been evident for the past two quarters, remain, with this segment growing 16.8 per cent year on year. Retail loan growth, too, has been at sub-20 per cent (17.8 per cent year on year) in Q3. What’s more, net interest margin declined 20 basis points year on year to 4.1 per cent. Maturities of foreign currency non-resident deposits maybe partly blamed for this. These deposits were issued three years ago. Incremental deposits raised since November 10, 2016, seen as not generating income for a brief while in Q3, have also dragged NIM.

Despite the challenges, gross or total non-performing assets (NPAs) were up marginally. Ratio of gross NPAs to total loans for Q3 stood at 1.05 per cent versus 0.97 per cent a year ago. Ratio of net NPAs (bad loans minus loan-loss provisions) to total loans increased only three basis points to 0.32 from 0.29 per cent a year ago on higher provisions; net NPAs were up 9.5 per cent year on year to Rs 715.8 crore in Q3. Paresh Sukthankar, deputy managing director, HDFC Bank, says, “Slippages came from corporate, retail, small and medium enterprise and agricultural loans.”

Having said that, if one is to compare HDFC Bank’s performance against peers, concerns aren’t any significant. The base is perhaps getting reset for the bank. Therefore, analysts say they won’t change their recommendation on the stock. But, they could lower their earnings estimates for FY18. “When loan growth and NIM are moderating, earnings moderation will also happen,” Nitin Kumar of Antique Stock Broking says. Given the bank is well-placed to bounce back ahead of industry growth whenever the recovery takes place, long-term investors could use any correction to buy.