Q3 comment. HDFC Bank: Loan growth slows, but remains healthy

After clocking 22-27 per cent year-on-year growth in loans for many quarters, HDFC Bank has delivered marginally lower growth in loans for two quarters in a row now.

From 18 per cent in the September quarter, total loan growth has slipped to 13.4 per cent in the December quarter, mainly due to lower traction in corporate loans.

After the stellar show by peers, such as IndusInd Bank (25 per cent year-on-year loan growth) and YES Bank (38.7 per cent), HDFC Bank’s performance may have disappointed investors a bit. But the bank’s overall performance remains noteworthy.

For one, with outstanding loans of ₹4,95,043 crore as of December 2016, HDFC Bank’s loan book is four to five times that of IndusInd and YES Bank.

On such a high base, loan growth of 13-odd per cent is healthy. Also, given that overall loan growth within the sector has slipped to an abysmal 5 per cent, HDFC Bank’s loan growth (of 17.5 per cent in domestic loans) is still 8-9 per cent above that of the industry.

Two, on the corporate loan side, there has been some impact on account of unwinding of the leveraged product the bank offered under the FCNR deposit scheme.

HDFC Bank raised $3.4 billion through FCNR deposits, almost 10 per cent of the entire amount raised by all banks through this facility.

To sweeten the deal, the bank extended overdraft facility to NRI depositors, with a lien on their deposits. This leveraged product was unwound to the tune of $2 billion in the December quarter.

Nonetheless, corporate loan growth has been slowing due to a higher base and more corporates raising funds from the bond market.

After a y-o-y growth of over 20 per cent over the past three-four quarters, corporate loan growth slowed to 14.6 per cent in the September quarter and 13 per cent in the latest December quarter.

Post-demonetisation, repayment of some of the working capital loans by SMEs has also impacted loan growth to some extent.

HDFC Bank’s retail loans though, continue to grow at a healthy clip. Auto and two-wheeler loans grew 17 per cent each, while personal loans rose a robust 32 per cent.

Credit card growth was strong at 20 per cent, with the bank continuing to enjoy the largest market share in the segment with loan book of ₹23,673 crore.

As was expected, the influx of deposits post-demonetisation has led to a sharp spike in the bank’s low-cost current and savings account (CASA) deposits during the quarter.

Current account deposits grew 36.7 per cent and savings bank deposits rose 37.8 per cent. While this led to fall in deposit rates and reduction in the bank’s cost of funds, margins fell from 4.1 per cent in the December quarter to 4.2 per cent in the September quarter.

The management gave a medley of reasons for this, such as lower traction in loans, unwinding of the overseas loans linked to FCNR deposits, and partial deployment of surplus funds (post-demonetisation).

Going ahead, HDFC Bank is relatively better placed to safeguard its margins under the marginal cost of funds-based lending rate (MCLR), as about 70 per cent of its loans fall under the fixed rate category. The bank’s margins in the past have been in the narrow 4-4.3 per cent range.

On the asset quality front, HDFC Bank has managed to keep its bad loans under check. Gross non-performing assets (GNPAs) stood at 1.05 per cent as of December 2016, only a tad higher than 1.02 per cent in the previous quarter.

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