HDFC Bank: As retail growth hits 3-yr low, key financials put to test in Q2

Is the glass almost full or a little empty? That’s how one would have to judge the recently published September quarter (Q2) results of HDFC Bank. Net profit (Rs 6,345 crore) growing by 27 per cent year-on-year, despite loan book growing only by 19 per cent year-on-year in Q2 is worth noteworthy. Gross non-performing assets ratio, which have lately been in the rise was contained at 1.4 per cent, near about last quarter’s numbers is also positive.

Yet, the quarter gone by had some party spoilers such as an unfavourable composition of loan growth, net interest income at Rs 13,515 crore growing by only 15 per cent year-on-year on a back of relatively weak loan growth and possibly for the first time in the recent years, net interest margin compressing by 10 basis points year-on-year to 4.2 per cent in Q2.

First on loan growth – while the overall book grew 19 per cent year-on-year, much of it seems to be been driven by corporate loans which increased by 31 per cent year-on-year. With HDFC Bank finding demand from non-banking finance companies, housing financiers and high-rated corporates, that’s helping it grow the corporate book.

Retail loans, considered as the bank’s forte, grew by only 14 per cent, the worst in three years. Weak automobiles demand and the bank deciding to go slow on unsecured loans led to the dip in pace of growth. Consequently, net interest income or NII also grew at a crawling pace of 14 per cent year-on-year, also the slowest growth in many years. Higher non-interest income (up 39 per cent) and tax outflows contained (thanks to a 500 basis point fall in tax rate) at a year-ago level did the trick for the bank in Q2.

In short, HDFC Bank’s Q2 show indicates the effect that loan growth slowdown could have on its financials.

While an optimist could say that under current circumstances, HDFC Bank’s show is worth appreciating, for long-term investors, it’s a bit of a let-down. Yet, in the current scenario quality stocks such as HDFC Bank will continue to command a premium. A majority of analysts polled on Bloomberg retain their ‘buy’ recommendation on the stock, though, they haven’t aggressively increased their target price, indicating that investors should moderate their expectations from hereon.