The profits of HDFC Bank Ltd have once again been higher than market expectations, with net profit being Rs606.1 crore for the June quarter, a growth of 30.5%.
Yet the stock fell 1% in a buoyant market on Tuesday, perhaps because most of its gains came from trading, which played the biggest part in boosting year-on-year (y-o-y) growth in operating profit.
As against profit on revaluation/sale of investments of Rs256 crore during the quarter, the year-ago period had a loss of Rs77.6 crore. While operating profit for the quarter grew by 47.8% to Rs1,518.7 crore over the corresponding quarter of the previous year, if the gains on revaluation/sale of investments are not taken into account, the core operating profit growth falls to 14.3%. But then, most bank results this quarter are likely to follow a similar pattern.
The quarter was expected to see slower loan growth and competition from public sector banks leading to margin pressures and a rise in bad loans due to the slowdown. Were these concerns justified?
In the last month, while the BSE Bankex has fallen 5%, the HDFC Bank stock is down 11%. Ahmed Raza Khan / Mint
The rise in bad loans during the quarter was marginal, with gross non-performing assets (NPAs) increasing to 2.1% of gross advances as on 30 June, compared with 1.98% at the end of March.
Net NPAs as a percentage of net advances has remained the same. Nevertheless, there has been an increase in restructured assets, which amounted to 0.55% of gross advances as on 30 June. That percentage continues to be one of the lowest.
Loan growth during the quarter has been very muted, with gross advances rising from Rs1,00,239 crore at the end of March to Rs1,05,288 crore at the end of June, a rise of 5% in three months. But the rate of growth has improved from the March quarter, when advances actually shrank. Ditto for deposits, which increased by just 2% during the quarter. But retail loans, at 58% of gross advances on 30 June, were slightly lower than at end-March, when they were 61% of gross advances.
The net interest margin (NIM) has only been a tad lower at 4.1% for the quarter compared with 4.2% for the March quarter. The bank points out, though, that part of its surplus liquidity was parked in tax-free money market instruments and, after adjusting for the lower tax rate, the NIM was stable at 4.2%.
Net interest income grew a tepid 7.7% y-o-y. Fee income, however, is up a respectable 27% y-o-y. Operating expenses have been contained and they’re lower than in the March quarter. Provisions continue to be much higher than in the year-ago period, which is why the growth in net profit is lower than the growth in operating profit.
As a research note by Motilal Oswal Securities Ltd puts it, “Given the management’s ability to earn superior risk-adjusted returns, prudent/conservative lending and accounting practices, and consistent performance, we expect HDFC Bank to continue trading at premium valuations vis-à-vis its peers.” But the premium also limits the upside, as seen from the stock trailing the Sensex in the last rally. In the last month, while the BSE Bankex has fallen 5%, the HDFC Bank stock is down 11%.
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