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Home >Markets >Mark To Market >HDFC Bank, IndusInd Bank reflect uneven recovery post covid

The covid-19 pandemic has affected different parts of the Indian economy differently. Those parts that got affected the most are yet to fully recover, while others have shown a quick bounceback. India’s banks are reflecting this as well.

The largest private sector lender, HDFC Bank Ltd, has managed to grow its loan book sharply despite a pandemic. That streak continued in the December quarter with loan growth coming at 16%, an early update by the lender showed. HDFC Bank had reported a similar growth in the September quarter as well. To be sure, there is deceleration from the pre-pandemic levels but the damage is hardly visible.

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In contrast, IndusInd Bank Ltd reported a stagnant loan book with no growth year-on-year. Analysts expect loan growth to remain muted in FY21 given the adverse economic conditions and caution from the management. Unlike its big peer HDFC Bank, IndusInd Bank seems to closely reflect the industry trend in growth. The bank reported a flat loan book year-on-year. To be sure, sequentially loan book expanded by 3.2% which points to steady improvement post pandemic.

Needless to say, HDFC Bank continues to enjoy a premium valuation compared with its peers. IndusInd Bank is yet to regain the love of investors. That said, HDFC Bank underperformed the broad market in 2020, something seen for the first time in seven years. One of the reasons is the slap on the wrist late last year by the Reserve Bank of India. The regulator, miffed by frequent digital outages at HDFC Bank, barred the lender from taking on fresh credit card customers until it resolves the issue. This has been a key overhang on the stock, especially since digital platforms have become an important differentiator post the pandemic.

Despite this, the stock continues to shine compared with peers and sector indices.

Will this difference between HDFC Bank and IndusInd Bank continue? The odds are high.

The answer lies in how much buffer lenders have built against potential risks. This would show in credit costs. Analysts expect credit costs to be elevated for IndusInd Bank while HDFC Bank may keep them in check. “Though slippages are likely to increase over 2HFY21, HDFC Bank carries a high provision buffer which would keep credit cost under control and limit the impact on profitability," said a report from Motilal Oswal Financial Services Ltd.

Indeed, provisions would determine the health of banks going ahead. Most lenders have beefed up provisions anticipating stress ahead but adequacy levels differ. Provisions and capital would be key factors that may separate banks into strong and not-so healthy in the coming quarters.

So far, valuations have captured this difference in performance of the asset side of banks. HDFC Bank’s stock trades at a multiple of 3.5 times its estimated book value for FY22, while IndusInd Bank trades at just 1.5 times.

Meanwhile, the single uniting factor among banks have been a steady deposit growth. Indians have been saving more and spending less and savings have been flowing into bank deposits. HDFC Bank’s deposit growth was 19% for the December quarter while IndusInd Bank reported an improvement to 11%. Both lenders have seen a rise in low cost deposits.

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