HDFC Bank's Q4 performance strong, but investors will have to be wary

Provisioning costs higher than expected; FY21 EPS estimated to decline by 2-4 per cent

If investors have to judge HDFC Bank’s March quarter (Q4) performance based on headline numbers, the bank would easily get a thumbs-up. But, as the numbers do not fully reflect the pain ahead, investors will have to be wary. The significant difference in FY21 earnings estimate (3.6 per cent decline in case of ICICI Securities; 11.6 per cent increase estimated by Prabhudas Lilladher) (compared to 20 per cent plus growth seen in past), is an indication of the road ahead.

Net interest income (NII) growth at 16.2 per cent year-on-year (yoy) exceeded expectations, but elevated provisioning costs restricted profit before tax growth to a mere 2.5 per cent yoy. 

Despite the 27 per cent decline in taxes, net profit growth at 17.7 per cent wasn’t as anticipated by analysts. The bank lost Rs 350 crore of business during March’s lockdown period.

Net interest margin maintained at 4.3 per cent is laudable and indicates that the bank isn’t bending backwards on profitability. Sequentially, even non-performing assets (NPAs) ratios have been steady, with gross NPA ratio at 1.3 per cent as against 1.4 per cent in Q3. Rajiv Mehta of YES Securities believes HDFC Bank stock will react positively on Monday to Q4 results. 

“Commentary on the quality of recent growth, extant delinquency trends and customer credit profile in unsecured and corporate portfolios was assuaging,” he adds.

But, what one needs to be mindful of is that Q4 results haven’t captured the full extent of the lockdown pain. According to the bank, the proportion of retail applications opting for moratorium is in single digits, while wholesale is negligible. However, they are mindful that the situation could change over time.

The provisioning cost of Rs 3,784 crore in Q4 includes Rs 1,550 crore of contingent provision for Covid-19 related asset quality costs, based on a stress test run by the bank. “Given that over 25 per cent of exposure is towards unsecured lending, business banking, two-wheeler, commercial vehicles and microfinance, we remain wary of future stress and are building-in elevated credit costs at 1.7 per cent,” say analysts at ICICI Securities. Those at Prabhudas Lilladher have revised slippage ratio (ratio of loans turning bad) to 2.15 per cent from 1.9 – 2 per cent seen in last two years.

The second aspect to monitor is the bank’s loan composition and growth rate. In Q4, share of retail loans fell to 49.8 per cent from 52.6 per cent last year. While retail segment grew by 14.6 per cent, it was visibly helped by personal loans and credit cards, which rose over 23 per cent year-on-year in Q4. No doubt, the bank has an excellent underwriting practice. But, how customers’ approach to loans would change amidst lockdown and salary cuts is a key monitorable.

Going ahead, growth may come largely from corporate loans, which rose by 28.7 per cent year-on-year in Q4. 75 – 80 per cent of HDFC Bank’s corporate loans enjoy AA or above rating, based on internal scorecard. Taking a cue from the commentary that it wouldn’t chase growth, analysts estimate sub-15 per cent growth for FY21 as against 18 – 20 per cent pegged earlier.

In other words, FY21 may pass as a below-normal year for the bank. While this may be true for the entire sector, defending stock valuations (2.7x FY21 estimated book value) could get tougher.