Home / Markets / Mark To Market /  Growth helps HDFC Bank, but stress remains a worry

HDFC Bank’s bullishness on balance sheet growth in the coming quarters, buttressed by a healthy performance for the September quarter, should be reason enough for investors to cheer.

India’s most valuable lender reported a net profit of 8,834 crore, a 17.5% year-on-year growth, for the September quarter. This was marginally higher than Street estimates. But more than the beat on profit, the bank’s business growth and the outlook on the same seem to have aided optimism over its valuations. In an earnings call with analysts, the management said loan growth across segments is expected to pick up further in the coming quarters. The management was particularly upbeat on the retail and rural segments. What’s more, loans to small businesses may more than double in FY23, the bank indicated.

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“Basis our modelling, whatever is the outstanding as of March 2022, we would be able to get the same amount of disbursements in FY23," said Rahul Shukla, head of corporate and business banking at HDFC Bank on the call. The lender expects high double-digit growth in its retail, commercial banking, rural loans and even mid-corporate loans for the current financial year.

For the September quarter, the bank reported an overall loan growth of 16% within which retail grew the fastest. Within retail, auto loans grew a healthy 36% despite the challenges faced by the sector. The bank said that this “against-the-tide growth" is encouraging. The removal of the regulatory ban on credit card issuance has also come to aid HDFC Bank’s retail ambitions and just in time too.

The lender has unleashed a slew of festival offers to grab market share and growth. As such, it has managed to issue more than 400,000 credit cards since the ban was lifted in August. Credit card portfolio grew by 13% in September and is poised for a faster growth in the current quarter as well.

“We are encouraged to see 5-7% QoQ (quarter-on-quarter) growth in retail/commercial loans and management outlook sounded of buoyancy," wrote analysts at Jefferies India Pvt. Ltd in a note. On the other hand, corporate loan growth was a drag, perhaps for the first time in many quarters for the bank. The portfolio grew by a mere 5.98% but the management sounded upbeat on this segment too.

“It all depends on infrastructure spending by the government. It could be one quarter away before we see corporates participating in the cycle," the management said. Core interest income growth remains healthy at 12%, while fee income has been the key ingredient for a decent operating performance.

But a bank’s performance is judged by its risk assessment, rather than by growth alone. For HDFC Bank, its pristine asset quality has remained a key differentiating feature on valuations vis-à-vis its peers. Here, there are some niggling worries.

To be sure, the bank’s gross bad loan ratio at 1.35% for the September quarter was an improvement. Its provisions too have slipped sequentially but the outlook is not of a straight improvement.

What has caught analysts’ attention is the large amount of write-offs and slippage from the first restructured loan pile. Restructured loans have risen to 1.35% of the total book from 0.8% in the previous quarter. Nearly 80% of the fresh restructuring has been from retail loans.

What’s more is that nearly a quarter of retail restructured loans has turned bad and 63% was written off, points out Jefferies. In short, the retail loan growth that the bank is getting is not entirely without trouble.

To be sure, the management has reiterated that slippages from the restructured pile would be under check. Even so, this is something to keep an eye on. The fact that there have been some lapses in processes does not help the bank’s cause. For instance, a whistle-blower has said that HDFC Bank charged a processing fee for loans where it found borrowers had forged documents, instead of flagging fraud.

Analysts, thus, are not in a hurry to increase their earnings estimates just yet, even though the growth outlook seems to be a strong reason to increase them.

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