PremiumMUMBAI: HDFC Bank Ltd has had some troubles when it comes to the performance of its subsidiaries following the pandemic, especially that of HDB Financial Services Ltd. Notwithstanding its own premium valuations, the lender’s shares have been under pressure so far in 2021 partly because of its subsidiary.
HDFC Securities Ltd and HDB Financial Services together contribute about 5% to HDFC Bank's total consolidated profits. HDB Financial reported a net loss for the December quarter and a sharp increase in stressed assets. Its gross bad loans surged to form 5.9% of its book adjusting for the judicial standstill at that time. What’s more is that loan growth was sluggish at 2% for the company.
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HDB Financial is a non-banking finance company set up by HDFC Bank in 2007. The company focusses on lending to small businesses and has a large portfolio of unsecured loans. About half of the portfolio was made up of unsecured and loan against property as of December. The increase in stress also resulted in a sharp rise in provisions for the company. The management had indicated that provisions may take some more time to stabilise but most of the stress has been recognised.
Jefferies India Pvt Ltd expects the lender to see a rebound in earnings in FY22. “Slower lending and sharp rise in credit costs had led to sharp contraction in profitability in FY21 and normalisation of credit costs will drive rebound in earnings from FY22 onwards," a note from the brokerage said.
Analysts also point out that compared with other large retail NBFCs, HDB Financial’s valuation is cheap.
For the bank itself, the profitability trend has been encouraging in the wake of the pandemic. True, the hit to loan growth and asset quality is visible. But restructured loans are likely to be low and the bank has made enough provisions to cover for any risks. That said, the sluggish growth that its retail book is stuck in should be a concern to investors.
HDFC Securities Ltd on the other hand had reported strong profit growth for the December quarter. The buoyancy in equity indices and a surge in retail participation have augured well for the firm. Active clients have grown at a steady pace, helping the outlook for future revenues. The net profit growth for December quarter was a robust 64% with revenues growing by 56%. HDFC Securities has lent some support to its parent’s valuations.
The bank’s shares have gained just 3% since January, a much slower rate of growth than its peers. The drag on share prices besides HDB Financial has been the bank’s own troubles with its digital services. Note that the lender has been penalised for regular digital outages and the regulator has barred the bank from issuing any fresh credit cards.
For its premium valuations to stick, HDFC Bank will need to get the green signal on cards and its subsidiary would have to fix its books.
