HDFC Bank: Ahead of the pack

Fundamentally, not much has changed for the banking sector over the past two years. But a few leading private sector banks that managed to tide over the challenges at the start of the sector’s downturn were weighed down by asset quality concerns and weak credit offtake in 2016-17.

Few others, however, have managed to put up a good show, retaining their healthy growth in loans and keeping bad loans under check.

HDFC Bank, the largest private bank, has been steadily growing its loan book by 20-25 per cent (year-on-year) on an average over the last seven-eight quarters, even as credit growth for the overall banking sector and for some of its private peers has been slipping. The bank has not thrown any nasty surprises on the asset quality front so far, which is a key positive. The RBI’s asset quality review in December 2015 and the recent circular on divergences in asset classification and provisioning (pertaining to FY16) which led to many other banks taking a knock, have not impacted HDFC Bank.

At the current price, the stock trades at about 4.3 times its one-year forward book value. This is higher than its five-year average of 3.4 times, but only marginally up from its peak levels of four times. Given that the bank’s earnings can grow by 20-22 per cent over the next two years, the stock is still a good bet for the long haul. Strong loan growth amidst weak credit offtake in 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.

HDFC Bank’s steady and consistent growth in its loan book over the past several quarters, despite the weak show within the industry, lends comfort.

The bank has gained around 2 percentage points market share in overall bank lending over the past eight quarters or so. Most public sector banks constrained by capital and worsening asset quality, have been consolidating their loan book. This has opened up lending opportunities for HDFC Bank.

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 then been able to retain its top slot, clocking double-digit growth.

In the June 2017 quarter, HDFC Bank managed to up its loan growth to 23 per cent, from 19 per cent in the March 2017 quarter. Loan growth for ICICI Bank and Axis Bank stood at a lower 11 and 12 per cent respectively, in the June 2017 quarter. The growth for these banks were mainly driven by the retail segment, while credit off-take in the corporate segment remained sluggish.

The growth for HDFC Bank however was led by both retail and corporate loans that grew 21.9 per cent and 25.5 per cent respectively. On the corporate side, a large portion of bank’s lending has always been for working capital financing, insulating it from the weak investment activity.

While the retail segment has become more competitive over the past couple of quarters, for HDFC Bank, all segments within retail continue to do well. Growth in credit cards and personal loans stood at around 37 per cent. Lending to the commercial vehicle segment too has been picking pace; it grew by 28 per cent in the June quarter.

One of the key positives for HDFC Bank has been its ability to keep bad loans under check, despite strong growth in loans. The bank has continued to maintain low delinquency, even as its peers ICICI Bank and Axis Bank, have been reporting sharp rise in bad loans, owing to their relatively higher exposure to stressed sectors. HDFC Bank’s gross non-performing assets (GNPAs) that have been hovering around the 1 per cent mark, saw a slight increase to 1.24 per cent of loans in the latest June quarter. But this is not of much concern.

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

The bank has also been able to keep its margins steady, despite the sharp fall in lending rates over the past year, thanks to its relatively higher mix of fixed rate loans. HDFC Bank’s margins remain within the narrow range of 4.2-4.4 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.

The bank also has a healthy mix of low-cost CASA deposits that aid margins. As of June 2017, CASA deposits constitute 44 per cent of total deposits.

The bank recorded 18 per cent growth in net profit in 2016-17 and 20 per cent growth y-o-y in the June 2017 quarter.

HDFC Bank is also well capitalised to fund its growth. The bank’s total capital adequacy ratio stood at 15.6 per cent as on June 2017 as against a regulatory requirement of 10.25 per cent.

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