Stock Fundamentals

HDFC Bank Q3 results: Net profit jumps, despite slow growth in core net interest income

Radhika Merwin | Updated on January 18, 2020 Published on January 18, 2020

A boost from other income, one-off recovery and lower tax, aid earnings

Given the persisting challenges within the banking sector, HDFC Bank’s December quarter performance lends comfort on several parameters. A strong 20 per cent growth in loans (when bank credit growth at aggregate sector level is just 7 per cent), near 33 per cent rise in net profit, strong capital ratios and only a marginal increase in GNPA ratioare key positives that can cheer investors. But significant moderation in net interest income growth, a rise in absolute bad loan figures and provision, and significant slowdown in retail loan growth are trends that will need a watch in the coming quarters.

Nonetheless, the bank’s ability to deliver healthy loan growth, diversified loan mix, improving operational efficiencies, steady rise in market share and ability to keep bad loans fairly under check is likely to drive premium valuations in the medium term.

Other income boost

After delivering a net profit growth of 20-22 per cent through FY19, HDFC Bank delivered a higher 27 per cent growth in the September quarter. In the latest December quarter, net profit growth has inched up to 33 per cent. But, just as in the September quarter, the bank’s earnings have been led by robust growth in other income. Growth in the bank’s core net interest income has, in fact, slowed sharply in the recent quarters despite healthy growth in loans.

From about 23 per cent in the first quarter of FY20, growth in net interest income fell to 14.9 per cent in the September quarter and further to 12.7 per cent in the latest December quarter.

An increase in gross non-performing assets (7 per cent QoQ) and slowdown in growth of high yielding retail loans have possibly impacted net interest income growth in the December quarter.

However, a robust growth in other income and reduction in tax rate provided a kicker to earnings despite notable rise in provisions. The robust growth of 35 per cent in other income was aided by strong growth of 24 per cent in fees and commission, gain on sale/revaluation of investments and a one-off recovery of ₹200 crore arising from resolution of an account under NCLT.

The bank’s provisions increased by 37 per cent y-o-y in the December quarter to ₹3,043 crore, which included one-off specific provisioning of ₹700 crore pertaining to certain corporate accounts. This is indicative of the persisting stress in the overall sector.

While HDFC bank’s GNPA as a per of loans has only marginally inched up to 1.42 per cent in the December quarter (from 1.38 per cent in the September quarter), it is important to note that in absolute terms, bad loans have risen by 23 per cent y-o-y. Since FY17, GNPA in absolute terms, has been growing 30-40 per cent y-o-y. However a healthy growth in loans has kept delinquency ratio (GNPA as a per cent of loans) at bay. But the bank has been facing stress in its agri portfolio. Also, the bank’s net NPAs (GNPA less provisions) has gone up by a higher pace in the December quarter, implying slightly lower provision cover.

However, the bank holds floating provisions of ₹1,451 crore and contingent provisions of ₹1,457 crore (as of December 2019) which lends comfort.


Steady rise in market share

While the bank’s core performance and asset quality trends will be keenly watched in the coming quarters, steady market share gains and superior operational performance and return ratios, over the past three to four years, will drive valuation.

In the September quarter of the 2015-16 fiscal, HDFC Bank had moved up in the pecking order among private banks in terms of loan book. ICICI Bank, which until then was the largest private bank in terms of loan book, slipped to the second spot.

From 7-odd per cent in FY16, HDFC Bank’s share in overall loans (non-food credit) has gone up to over 9 per cent in FY19. A well-balanced loan mix has helped the bank deliver a healthy growth despite challenges within retail and corporate segments in certain periods.

For instance, after reporting a robust 27 per cent growth in FY16, HDFC Bank’s overall loan growth moderated to 18-19 per cent levels in FY17 and FY18. Slowdown in corporate loans (to about 20 per cent in FY17 from 27 per cent in FY16) had impacted growth in FY17, and in FY18 corporate loans grew by a more modest 9 per cent. But strong retail loan growth of 26-27 per cent during FY17 and FY18 helped the overall loan growth.

In FY19, the tables turned and it was corporate loans that drove the overall loan growth. HDFC Bank managed a higher 24 per cent loan growth in the FY19 fiscal, backed by strong uptick in corporate loan growth (31 per cent). There was a considerable slowdown in retail loan growth (19 per cent) in FY19, owing to the underlying weakness in the four-/two-wheeler segments.

In the latest December quarter, loan growth came in at 20 per cent, with corporate loans growing by 29 per cent and retail by14 per cent. The slowdown in retail loans has been led by segments such as auto, two- wheeler and CV/construction equipment.

Published on January 18, 2020
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