Silver jubilee years could bring a sense of satisfaction or even a quarter-life crisis.
For HDFC Bank investors, it brings both.
The private lender reported stellar profitability metrics yet again and decided to distribute an interim dividend to mark its 25th year of operations. Net profit grew 21% and toxic levels for the loan book remained at one of the lowest in the industry.
HDFC Bank’s secret sauce for its pristine balance sheet is no secret at all. The bank has been a retail lender for long, with corporate loans accounting for less than half of its portfolio, unlike its peers where these loans dominate.
That and the fact that loan growth has been over 20% consistently have helped keep bad loan ratios at low levels.
But there is more to it than meets the eye.
As the chart above shows, HDFC Bank’s bad loan stockpile has been volatile and so have been its provisions in recent years.
This shows that even the strongest player is not immune to the headwinds of a slowing economy and overleveraged industry.
For the June quarter, it had to increase provisions by 60% as stress from agriculture loans rose as also stress emerged on its exposure to non-bank lenders. Given the consumption slowdown, HDFC Bank doesn’t want to take a chance on its unsecured loans either. The management, in a conference call with analysts, said that it is cautious about lending to non-banks and has ramped up provisioning for unsecured loans.
Moreover, its loan growth has decelerated sharply to 17.1%, led by a slowdown in vehicle loans. This was expected as Indians haven’t been buying cars and bikes at a rate their makers wanted in the last two years at least. “HDFC Bank is most dominant in two-wheeler financing within the private banks, two-wheeler book constituting 8% of its vehicle finance book," analysts at brokerage firm Jefferies had noted in April.
For the June quarter, vehicle loans grew just 8% compared with 12% in the previous quarter.
Analysts believe that in the next few quarters too, loan growth could be moderate compared with the bank’s historic performance. That said, analysts are hopeful the bank will continue growing its core income at historic trend. “We expect company to grow its NII (net interest income) at a CAGR of 20% over the next two financial years. Healthy advances growth and cross sell opportunities in the existing high quality deposit franchise will help in delivering strong NII going forward," brokerage firm Anand Rathi Share and Stock Brokers Ltd said in a note.
Even so, the slowdown in loan growth comes at a time when the bank is staring at a top management change. This is a key overhang for the stock.
Managing director Aditya Puri will exit halfway through FY21, given that service age for bank executives is capped at 70 years. Puri’s shoes are too big to fill, considering he steered the bank since the beginning. It is searching for a successor, a task that got tougher after deputy Paresh Sukthankar left last year.
HDFC Bank’s 25 years have been marked with a balance sheet built out by avoiding loans to infrastructure and other dodgy borrowers. Investors have a year and a half to find out whether the successor will take decisions similar to Puri’s.
Meanwhile, the stock trades at a multiple of 3.3 times its estimated book value for FY21, cheaper than that of Kotak Mahindra Bank, another lender with enviable asset quality.
