Rise in HDFC Bank's NPAs a transient pain

Agri stress pushes up gross NPAs to 1.24%, the highest in recent times

For HDFC Bank investors, used to seeing gross non-performing assets (NPAs) of about 1 per cent, the June quarter (Q1) result is certainly an aberration. The gross NPA ratio ebbed higher, coming in at 1.24 per cent, near about the bank’s 10-year historic average of about 1.3 per cent. Paresh Sukthankar, deputy managing director, said of the total increase in gross NPAs, 60 per cent pertained to the agricultural segment. Recoveries were relatively weak in this segment due to farm loan waivers announced by various state governments. According to the bank’s FY17 annual report, it had exposure of Rs77,921 crore to the agriculture sector, classified as priority sector loans (PSL) and non-PSL exposure such as Kisan Gold Card loans.
 
Q1 numbers, however, suggest HDFC Bank is pruning its Kisan Gold Card loans portfolio, as this exposure has reduced from Rs28,258 crore in the March quarter to Rs27,685 crore. The bank also has exposure to microfinance institutions (MFIs), reflected in Rs20,000 crore of loans to the development banking segment.
 
A cautious Sukthankar said clarity was required in terms of understanding the nature of these farm loan waivers and customer behaviour on repayment of dues. This leads to two conclusions. First, contrary to the popular perception that farm loan waivers may have negligible impact on banks and MFIs, HDFC Bank’s Q1 NPA performance dismisses this notion. RBL Bank and IndusInd Bank also showed stress in their MFI business in Q1. Second, only as more details emerge on the nature of waivers will the impact become clearer. Analysts, therefore, believe the agriculture sector stress may weigh on banks for a quarter or two.
 

 
Apart from higher NPA ratios, HDFC Bank’s provisioning for bad loans also rose by 80 per cent (the biggest jump in provisioning in recent times) to Rs1,558 crore in Q1. This includes Rs1,343 crore of specific loan-loss provisions and general provisions of Rs206 crore. Pursuant to an April 18 directive issued by the Reserve bank of India (RBI), the bank has provided an additional Rs121 crore towards standard advances for stressed sectors, such as telecom, iron and steel.
 
Analysts, such as Rajiv Mehta of IIFL, however, believe higher provisioning and NPA ratio may just be a transient pain for the bank. “I expect this to get corrected in the due course and what doesn’t get corrected may get written off or fully provided for at a later date,” Mehta said. Siddharth Purohit of Angel Broking said as long as the core performance remained strong, there wasn’t much to worry. Having said that, the bank’s NPA ratios were well under control and among the best in the industry, and core business was doing well. Net profit expanded by 20 per cent year-on-year to Rs3,894 crore (in line with the Street's expectations) after being below 20 per cent levels in previous two-quarters, helped by similar net interest income growth to Rs9,371 crore. Net interest margin was also maintained at 4.4 per cent. The HDFC Bank stock closed at a 52-week high of Rs1,734.55 (up 1.8 per cent) on Monday.