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Business News/ Market / Mark-to-market/  Good loan growth, low bad debt help HDFC Bank beat slowdown blues in Q3
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Good loan growth, low bad debt help HDFC Bank beat slowdown blues in Q3

As the December quarter numbers show, HDFC Bank has a track record it can brag about

The trigger for the stock here on is likely to be how fast it can grow its balance sheet. Photo: Priyanka Parashar/MintPremium
The trigger for the stock here on is likely to be how fast it can grow its balance sheet. Photo: Priyanka Parashar/Mint

Following the Reserve Bank of India’s asset quality review at the end of last year, it was expected that banks would make an increase in provisions in the December and March quarters. While HDFC Bank Ltd too saw an increase in bad loans, the lender’s management said that impact of the central bank directive was “negligible".

The bank’s gross non-performing loans ratio increased 6 basis points from a year ago to 0.97% (a basis point is one-hundredth of a percentage point). That it is able to keep its bad loans ratio below 1% in this tough macroeconomic environment is one reason why it commands a high valuation.

The second reason for the bank’s one-year forward price-to-book multiple of 3.64 times is the fast-paced growth of its balance sheet, yet again belying the underlying operating environment. HDFC Bank grew its loan book by one-quarter from a year ago, more than double the industry growth rate.

While its stronghold—retail loans—grew 30% from a year ago, corporate loans grew by one-fifth. While that pace is below the 25% growth seen in the September quarter, it is creditable given that demand for project loans and greenfield financing haven’t really taken off.

That loan book boost and a 10 basis point increase in net margins resulted in a net interest income growth of 24.8%. Strong treasury income helped overall non-interest income grow 13.3%. This helped HDFC Bank’s operating profit and net profit grow by about one-fifth each, a result forecast more or less accurately by the Street.

A 23.7% growth in its low-cost current and savings account deposits comes as a bonus. A 20% profit growth has become something of a norm for the bank. It is also consistently hitting a 1.9-2% return on assets ratio, among the best in the banking industry.

The trigger for the stock here on is likely to be how fast it can grow its balance sheet. That is not easy especially in this tepid environment for bank credit—commercial papers still score when it comes to rates. But as the December quarter numbers show, HDFC Bank has a track record it can brag about.

The writer does not own shares in the above-mentioned companies.

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Published: 25 Jan 2016, 09:30 PM IST
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