HDFC Bank Q2 nos: Strong core performance, but loan loss provisions spike

But for the near-doubling of provisions due to one account that remains under regulatory observation, HDFC Bank’s September quarter performance has been steady.

Healthy traction in both retail and corporate loans, more or less stable net interest margin, improving cost-to-income ratio and healthy growth in fee income have kept the bank’s earnings in good stead. Net profit in the September quarter grew 20 per cent year-on-year, led by 22 per cent growth in net interest income and 24 per cent growth in fee income.

HDFC Bank, up until now, had not thrown any nasty surprises on the asset quality front. The RBI’s asset quality review in December 2015 and the circular on divergences in asset classification and provisioning (pertaining to FY16), which led to many other private banks reporting sharp rise in slippages, had not impacted HDFC Bank.

In the September quarter, however, the bank made significant contingent provisions for one account, that underwent flexible structuring under the 5:25 scheme. While the account remains standard in HDFC Bank’s books, the RBI has made certain observations, further clarity on which is awaited.

In the meantime, the bank has made sufficient contingent provisions for the account.

Total provisions have nearly doubled, within which, loan-loss provisions have gone up by a steep 68 per cent y-o-y. Given that the bank has made provisioning as per regulatory requirement on the account under observation, further sharp increase in provisioning is unlikely.

That said, the growing stress within the banking system has to some extent rubbed off on HDFC Bank too, going by the incremental addition (though modest when compared to peers) to its bad loan book over the past couple of quarters.

HDFC Bank’s gross non-performing assets (GNPAs) that had been hovering around the 1 per cent mark, saw a slight increase to 1.24 per cent of loans in the June 2017 quarter. This was on account of recoveries being impacted in the agricultural advances following the farm loan waiver announcements.

Overall, in absolute terms, in the first half of FY18, GNPAs grew by 52 per cent y-o-y.

Nonetheless, the healthy growth in the bank’s loans has kept the delinquency ratio at bay. The GNPA ratio has inched up to 1.26 per cent in the latest September quarter, but still remains much lower than other leading private banks.

Constraints faced, in particular, by public sector banks, due to lack of capital and worsening asset quality, have presented ample growth opportunities for HDFC Bank that has gained around two percentage points market share in overall bank lending over the past eight quarters or so.

In the September quarter, the bank grew its loan book by 22 per cent.

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