HDFC Bank: Core performance steady

But for the blip in asset quality following the farm loan waiver announcements, HDFC Bank’s June quarter performance was business as usual.

Strong loan growth amid weak credit offtake within the industry, superior net interest margin, and low delinquencies compared to the sharp rise in bad loans reported by peers -- are key positives that are likely to sustain the bank’s premium valuations.

Steady growth in loans

Given the sudden spike in slippages and a sharp divergence in bad loans (pertaining to FY16) reported by other leading private banks, HDFC Bank’s more or less stable asset quality has earned brownie points from investors. But what has really been heartening is the steady and consistent growth in its loan book over the past several quarters, despite the weak show within the industry.

Constraints faced in particular by public sector banks, due to lack of capital and worsening asset quality, has presented ample growth opportunities for HDFC Bank, that has gained around 2 percentage points market share in overall bank lending over the past eight quarters or so. The bank has also been able to race ahead of its private peers.

In the September quarter of the 2015-16 fiscal, HDFC Bank had moved up in the pecking order among private banks in terms of loans.

ICICI Bank, which until then enjoyed the status of the largest private bank in terms of loans, slipped to the second spot. HDFC Bank has since been able to retain its top slot, clocking double-digit growth. ICICI Bank and Axis Bank managed a y-o-y growth of just 5-6 per cent and 10 per cent growth, respectively in the last two quarters.

In the June quarter, HDFC Bank has upped the ante, managing to ramp up its loan growth to 23 per cent from 19 per cent in the previous quarter. The growth has been driven by good growth in both retail and corporate loans that grew 21.9 per cent 25.5 per cent, respectively.

While retail segment has become more competitive over the past couple of quarters, for HDFC Bank all segments within retail continue to be firing. Growth in credit cards and personal loans stood at around 37 per cent.

Lending to the CV segment too has been picking pace, which grew 28 per cent in the June quarter. On the corporate side, large portion of the bank’s lending has always been for working capital financing, keeping it fairly insulated from the downturn in investment cycle.

Slight slip

HDFC Bank continues to maintain low delinquency, even as its peers ICICI Bank and Axis Bank -- owing to their higher exposure to stressed sectors -- have been reporting a sharp rise in bad loans.

HDFC Bank’s gross non-performing assets (GNPAs) that have been hovering around the 1 per cent mark, however, saw a slight increase to 1.24 per cent of loans in the latest June quarter.

The management had indicated that 60 per cent of the increase in bad loans was due to recoveries being impacted in agricultural advances. Various states announcing farm loan waivers had led to uncertainty among borrowers, impacting recoveries. The bank has made higher provisioning as a prudent measure.

Specific loan loss provisioning has gone up from Rs 832 crore in the corresponding quarter of last year to Rs 1,343 crore in the latest June quarter.

Healthy loan growth and strong margins, though have kept the bank’s earnings on a strong footing. HDFC Bank’s margins remain within the narrow range of 4.2-4.3 per cent. The bank has been 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.