Till now it was ICICI Bank Ltd that was shrinking to safety. In the December quarter, HDFC Bank Ltd seems to have followed suit.
The bank’s total customer assets , which includes advances, corporate debentures and the like, amounted to Rs100,682 crore as on 31 December, compared with Rs107,820 crore as on 30 September. That’s a contraction of 6.6% over the quarter.
Advances outstanding fell from Rs102,222.30 crore at the end of September to Rs98,784.17 crore at the end of December. But the bank’s gross non-performing assets, or NPAs, still went up by Rs235 crore during the quarter to Rs1,911 crore. One reason for the spike in NPAs is the lower quality of advances of Centurion Bank of Punjab that merged with it.
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The bank’s balance sheet size, however, increased during the quarter. On the asset side, it was primarily because of higher investments. The bank was able to make a neat profit on the fall in interest rates during the period, with profit on revaluation and sale of investments at Rs232.1 crore during the December quarter, compared with Rs131.5 crore in the year-ago period. Its deposits, too, rose substantially in the quarter (8.3%).
HDFC Bank’s results for the December quarter are for the merged entity, while the results for the year-ago period are for HDFC Bank before the merger, which makes them not comparable. A better option would be to contrast September quarter results, which also include Centurion Bank, with those for the December quarter.
Seen from that perspective, HDFC Bank’s net profits are up 44.8% in the December quarter, compared with 43.3% in the September quarter. But net revenues (net interest income plus other income) rose at a far more sedate pace (37.9%) than in the September quarter (52.6%). So, how come growth in net profits was so much higher, on a year-on-year basis, in the December quarter?
The main reason is that operating expenses rose at a much lower rate during the December quarter. Operating expenses were 50% of net revenues, compared with 55.3% of net revenues for the September quarter. Loan loss provisions amounted to Rs465.4 crore against Rs337.3 crore during the September quarter.
Net interest margin has been higher at 4.3% in the December quarter, compared with 4.2% in the September quarter. This has happened in spite of a lower proportion of low-cost current and savings accounts. The bank management says that this was a consequence of the bank not chasing bulk deposits. They also say that the fall in the CASA (current account, savings account) proportion was on account of high growth in fixed deposits last quarter and this rate of growth is expected to come down in future.
What lies ahead? The bank management says the negative growth in advances during the quarter was a one-off, the result of the liquidity crunch. Next fiscal, the management expects total bank credit to grow by 17-20% and HDFC Bank’s loan growth has traditionally been about 5-6 percentage points higher than growth for the system. Margins are likely to revert to the 4-4.2% range. But bad debt is likely rise, not only for advances made by Centurion Bank but also in HDFC Bank’s own small and medium enterprise portfolio.
The bank’s strategy of going slow on growth is the right one in the current environment. Returns from investments will help cushion the slowdown in advances, but much depends on the efficiencies that the bank is able to squeeze out of its operations and on the extent to which bad loans increase.
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Graphics by Sandeep Bhatnagar / Mint