High base effect is catching up with HDFC Bank

Days of 20-25 per cent growth on all fronts might be well behind the lender

There are three factors that surprised investors in September quarter results posted by HDFC Bank. First, the bank has a strong track record of beating Street expectations with a huge margin. That didn’t happen in Q2. Net interest income (NII) at Rs 7,993 crore missed the street estimate; brokerages like Ambit Capital, Motilal Oswal Securities and Jefferies had pegged it between Rs 8,306 crore and Rs 8,376 crore. Net interest margin (NIM) at 4.2 per cent was similar to a year-ago level. Total income at Rs 19,971 crore grew 15.3 per cent, largely helped by non-interest income of Rs 2,901 crore, up 27 per cent. Net profit at Rs 3,455 crore, up 20.4 per cent year-on-year, was a shade lower than Bloomberg consensus estimate of Rs 3,470 crore. The other eye-catching factor in Q2 results was the numbers suggested a probable departure from the historic 20-25 per cent growth on all fronts. Apart from headline growth rates, parameters such as growth in advances (Rs 4,94,418 crore in Q2, up 18 per cent year-on-year) and deposits growth (Rs 5,91,731 crore, up 17 per cent in Q2) also missed the historic levels.

“It is becoming difficult for HDFC Bank to repeat its historic growth patterns,” says Shweta Daptadar of KRC Research. Not just this, gross non-performing assets (GNPA) ratio, which rose to over one per cent level in June quarter, continues to remain at these levels (1.02 per cent in Q2 versus 0.91 per cent in Q2FY16). Paresh Sukthankar, deputy managing director, HDFC Bank, says, “GNPA ratio of less than one per cent may be more of an aberration and our average GNPA ratio in the past 21 years stands at 1.3 per cent.”

Seen in total, these factors suggest that the impact of high base is perhaps catching up on HDFC Bank and explains why the stock fell by over a per cent in Tuesday’s trade to end at Rs 1,250.

“The operating environment is also becoming challenging for HDFC Bank as there is more competition vying for the same pie,” Daptardar explains.

Nevertheless, analysts say it is still too early to exercise caution on HDFC Bank. “While the pace of growth may be slowing, when seen against other corporate lenders, HDFC Bank offers stability to investors,” Daptardar says.

This factor compensates for the slowing growth rate and justifies the premium valuation of HDFC Bank, according to analysts. HDFC Bank currently trades at 3.8 times its FY17 book value and remains the most expensive stock in the banking universe, even after coming down from a year-ago level of 4.5-5 times.