HDFC Bank delivered 21 per cent growth in net profit in the quarter ended June, over the same quarter the previous year, on the back of a 21 per cent growth in its loan book. While profit growth has been slowing in recent quarters, given that the banking industry has been grappling with three years of continuous economic slowdown, the private sector bank has put up a good show.
HDFC Bank maintains stable margins and steady asset quality. The only weak link is its slowing retail loans.
Stable marginsWhile HDFC Bank still outperforms industry credit growth by 6-8 per cent, as it has done in the past, growth in recent quarters has been driven by the corporate segment rather than the retail loan portfolio; a trend in contrast to peers such as ICICI Bank and Axis Bank. For HDFC Bank, this is the third consecutive quarter when loan growth was driven by the corporate segment. In the latest June quarter, the bank has been able to grow its retail loan book by 14 per cent (adjusted for reclassification of loans between wholesale and retail). The slowdown in lending to the auto segment and sluggishness in the commercial vehicle and construction equipment segments has impacted retail loan growth.
The growth in loans has been driven by corporate loans, mainly for working capital financing. The corporate loan book has gone up by 19 per cent in the June quarter.
Despite the faster growth in corporate loans, however, the loan mix has not changed significantly over the last year. Retails loans are still more than half of the bank’s loan portfolio. This has helped the bank maintain a stable margin performance. HDFC Bank has traded at a hefty premium to its peers, thanks to its well-diversified loan book, better return ratios, sufficient capital cushion and low loan delinquency. While slowing retail loans have been a concern, HDFC Bank continues to score well on other parameters.
Asset qualityIt has, for instance. one of the best and most stable net interest margins in the industry, at 4.4 per cent. The bank has also maintained stable asset quality in challenging times in the banking sector.
While there was some pressure on asset quality in the June quarter, with gross non-performing assets (GNPA) going up sequentially to 1.07 per cent of loans from 0.98 per cent in the March quarter, loan delinquency is still amongst the lowest in the industry. Even the bank’s restructured book is just 0.2 per cent of loans, much lower than about 2.5 per cent for peers such as ICICI Bank and Axis Bank. This lends comfort, as increase in provisioning requirement is less likely than its peers, with tighter provisioning norms coming into force from April 2015, when the benefit of “regulatory forbearance” on restructuring will no longer be available.