HDFC Bank: premium for consistency
At a time when the Indian banking industry is grappling with bad loans, a consistent performer like HDFC Bank Ltd is much sought after by investors. That is why the lender, also the country’s most valuable bank, enjoys a price-to-book valuation of 3.7, well above its peers. The premium reflects investor confidence in its ability to deliver stable earnings.
As usual, HDFC Bank met expectations on most counts in its June quarter earnings. Net profit rose 20.14% year-on-year, (y-o-y) backed by growth in its retail business. In the March quarter, net profit had risen 20.2%. That’s how consistent HDFC Bank’s profit growth has been.
Net interest income (NII) grew 22% y-o-y. Surprisingly, the net interest margin (NIM), which had been expected to remain stable, rose sequentially to 4.4% in the quarter from 4.3%, aided by moderating deposit costs.
Gross non-performing assets (NPAs) and net NPAs rose sequentially to 1.04% and 0.32% of the total loan book, respectively, because of defaults in the small and medium enterprises segment. Provisions for bad loans increased 19% y-o-y and 30.8% quarter-on-quarter (q-o-q), in part due to funds set aside for loans to Punjab for food procurement. Analysts don’t see the marginal rise in bad loans as a concern. Also, the spike seen in provisions is due to a one-off factor and one shouldn’t read too much into it, they say.
HDFC Bank’s current and savings account (CASA) ratio was stable y-o-y at 40%; although it was lower than the 43% seen in the March 2016 quarter. While the bank is making efforts to expand branches, pushing CASA to higher levels would be a challenge.
It’s a measure of investors’ confidence in HDFC Bank that its shares touched an all-time high of Rs.1,239.90, before closing down a mere 0.15% on the Nifty on Thursday, while the Nifty Private Bank Index fell 1.55%.