HDFC Bank Ltd hit all the right notes with investors as it reported a bounce back in its profit growth, stable asset quality and expansion in net interest margin for the fourth quarter of 2016-17.
India’s most valuable private sector lender reported a net profit of Rs3,990.1 crore for the March quarter, an 18.3% increase from the previous year, compared with the tepid 15% rise in the December quarter. The fact that most of its metrics have rebounded from their dip in the December quarter shows that it has left the effects of demonetization firmly behind.
Despite its size, HDFC Bank’s core income growth as well as loan book expansion rivals that of fast-growing small banks, with net interest income growing 20.29% on the back of a loan book growth of 19.4%. The growth in both its retail and corporate loan book was fast paced.
To that effect, the more than 2% rise in its stock on Friday in response to the numbers is justified.
Investors have always rewarded HDFC Bank’s consistent performance and it has become something close to an unshakeable faith that it would not disappoint in any quarter. One does not earn the label of the most valuable bank without consistent performance.
But it is time to slip in a nugget of caution. Provisions doubled in the March quarter to Rs1,261.8 crore, of which Rs977.9 crore was towards bad loans. Paresh Sukthankar, deputy managing director of the bank, said that a bulk of the rise in provisions has been due to those made against standard loans. While this rhymes with the strong loan growth, the numbers tell a different story.
Provisions towards bad loans grew 100% while those towards standard performing loans grew 73% from a year-ago. Again, according to Sukthankar, the rise is due to a dispensation by the Reserve Bank of India that allowed the lender to postpone labelling certain borrowers as bad, a move that came in the aftermath of demonetization. Even after factoring in this dispensation, the rise in provisions is high.
Let’s stretch the story further, and HDFC Bank’s gross non-performing loans have shown at least a 20% year-on-year increase every quarter since December 2015 while its net non-performing assets (NPAs) have shown a bigger increase. Of course, as a percentage of total loans, it is still at an enviable 1.05%.
The fact that net NPAs have risen faster than gross bad loans shows that provisions have not kept pace. While the bank hasn’t disclosed its provision coverage ratio, the number is likely to show a decrease over time.
Investors still have unshakeable faith in HDFC Bank but they need to agree with Sukthankar’s comment that the lender is not insulated in a challenging environment.
Mark to Market writers do not have positions in the companies they have discussed here.