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Business News/ Market / Mark-to-market/  HDFC Bank’s growth now linked to loan book
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HDFC Bank’s growth now linked to loan book

The lender has been tight with operating expenses, but these rose close to one-fifth in Q2, which means profit growth would tend to closely follow loan growth

A return to its 30% profit growth levels would renew investor interest, but that depends on loan growth which in turn would be based upon the strength of the economic recovery. Premium
A return to its 30% profit growth levels would renew investor interest, but that depends on loan growth which in turn would be based upon the strength of the economic recovery.

HDFC Bank Ltd seems to have squeezed the towel dry, at least for now. Net interest margin for the September quarter was 4.5%, close to a historic high. The bank’s return on asset of 2.01% (annualized) is again at a 14-year high. The lender has been tight with its operating expenses, but that can only take you so far.

With new branches necessary for growth, cost-to-income ratios will inch up. Operating expenses rose close to one-fifth in the September quarter after four quarters of single-digit growth rates. Thus, it follows that profit growth would tend to closely follow loan growth.

By that yardstick, the bank has done well. Loan growth in the September quarter was 21.8%, double the industry pace. This loan growth has mainly been driven by corporate loans and advances with ticket sizes larger than 5 crore. Growth in this segment, which makes up about half of HDFC Bank’s loan book, was 30% from a year ago. Smaller retail loans (as per the Basel classification) grew just 9.8%. This latter segment’s growth was greater than 25% as recently as the June 2013 quarter and was a key driver of HDFC’s loan book. That the bank has been able to manage the slowdown and expand loans in other areas is a sign of its all-round strength.

Although recent increases in the corporate business were mainly working capital advances—not always a good omen—the bank’s bad loan management has been exemplary for a loan book of its size. Gross non-performing assets (NPAs) continued to hover around 1% of the loan book.

The bank is trading at 4.1 times its expected book value for the current fiscal year. That could be one reason why it has trailed the S&P BSE Bankex since the beginning of this fiscal year. A return to its 30% profit growth levels would renew investor interest, but that depends on loan growth which in turn would be based upon the strength of the economic recovery.

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Published: 21 Oct 2014, 06:23 PM IST
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