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HDFC Bank posted stellar numbers for the quarter ended March 31, 2021, on Saturday. With a healthy loan growth of 14 per cent y-o-y and non-performing assets contained at 1.32 per cent (compared to proforma figures of 1.38 per cent in the December 2020 quarter), the bank posted an 18.2 per cent growth in its net profits (at ₹8,186.5 crore).
But the stock is down by about 3 per cent today. Although volatility in the broader markets may have played a part, the key concerns could be the likely impact of the on-going ban on credit card issuance and the bank’s aggressive growth in wholesale lending on earnings, in the coming quarters.
HDFC Bank Q4 net profit up 18.2%
Card-ban not a problem
The RBI had, in December 2020, ordered the bank to temporarily stop sourcing of new credit card customers (among other things), until further notice. Despite this, the bank’s credit card book grew by 12 per cent y-o-y to ₹64,674 crore in the March 2021 quarter — on par with 10-12 per cent y-o-y growth in the previous three quarters of FY21. The growth in credit card business is of importance to the bank’s earnings as, while it constitutes just about 6 per cent of the bank’s gross advances, it contributes to nearly 15 per cent of the bank’s core operating profit.
HDFC Bank’s Rahul Shukla confident about bank’s portfolio
Not only does the issuance of credit cards lead to a healthy flow of fee income (grouped under other income), but also the loan book flowing from credit cards enjoys higher net interest margins (above 20 per cent, compared to the bank’s overall NIMs (net interest margin) at 4.2 per cent).
The RBI’s ban on issuance of new cards is not a cause of concern, according to the management, given the bank’s sourcing profile. About three-fourths of the sourcing for credit cards comes from existing customers of the bank, who have pre-approved credit limits. The management is also confident of recouping any residual drop in credit card business, within months of the RBI lifting the said ban.
Quality speaks
The bank’s loan book growth was largely led by wholesale book — up 21 per cent, while retail advances only inched up by 6.7 per cent (y-o-y). While the wholesale advances helped the overall loan book grow by 14 per cent y-o-y to ₹11.3 lakh crore, the overall NIM dropped to 4.2 per cent from 4.3 per cent in the corresponding quarter last year. Given the abundance of liquidity in the corporate debt market, the street probably fears a further drop in margins, in the coming quarters, if such aggressive growth in wholesale book were to continue.
But despite some moderation in NIMs, the bank’s earnings may not be significantly impacted, given its continuing focus on quality. According to the management, about 62 per cent of the incremental wholesale portfolio is rated AA and above. Besides, based on the bank’s internal ratings, the outstanding wholesale book has an average rating of 4.33 (on a scale of 1 to 10, with 1 being the best and 10 the worst). The unsecured exposure also has an even better rating of 3.36 on an average. The bank’s contained credit costs (provisions as a percentage of AUM) during the pandemic also provide greater cushion on the asset quality front.
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