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India’s most valuable lender, HDFC Bank, didn’t live up to market expectations in its June-quarter performance. As rare as this is, the modest performance cannot be laid squarely at the altar of the pandemic. At the same time, this is a wake-up call for investors who have so far disregarded the impact of the second covid wave.

The private sector lender reported 7,729.6 crore as net profit for the June quarter, lower than analysts’ estimates. It reported an 8% rise in its provisions on the back of increased stress, which was one of the factors behind the net profit miss.

HDFC Bank had to set aside 4,830 crore as provisions and beef up its contingency provisions by 600 crore as the second covid wave drove slippages higher by 60% from the previous quarter.

Changing wings
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Changing wings

What’s more, its restructured loan pile rose to 0.8%, and the management expects more borrowers to seek easier loan terms in the coming quarters. In short, borrower stress has increased and may take a while to come under control.

But all this has not perturbed analysts too much. That is because the management’s guidance in its interaction with them has been optimistic.

“Management highlighted MSME (micro, small and medium enterprises) delinquency trend has improved, and incremental MSME NPAs (non-performing assets) are lower than the previous quarter. Also, the corporate book is resilient. This suggests stress is primarily flowing from the retail/agri segment," analysts at ICICI Securities Ltd wrote in a note.

In a conference call on Saturday, the management indicated that collection efficiencies bounced back in July. More importantly, the stress among small businesses seems to have lessened. Retail and agriculture, though, remain potential pain points.

That brings us to growth. HDFC Bank’s premium valuations have been as much about growth as impeccable asset quality. In that, the wholesale loan segment has been driving growth since the pandemic began. Retail has suffered, and the quarter-on-quarter contraction shows that the pain is yet to subside.

The deceleration has prompted analysts at Nomura Financial Advisory and Securities India Pvt. Ltd to scale back their loan growth estimate for FY22 by 4%.

Earnings per share estimates have also been pruned for the FY22-24 period. Where the performance has left investors disappointed, HDFC Bank’s management has given hope. Recovery in the coming quarters is expected to be strong, both on growth and asset quality.

One unresolved issue is with the ban on credit card issuance by the regulator. In the absence of any clarity from the bank, this may continue to bother investors. “In the near term, lifting of RBI (Reserve Bank of India) restrictions remains a key monitorable," wrote analysts at Motilal Oswal Financial Services Ltd in a note.

The upshot is that HDFC Bank still has to fix its retail loan book growth fully. Notwithstanding its troubles, the lender wins when compared with peers. This is the final factor that investors of financial companies need to digest. When one of the most conservative balance sheets is impacted by the pandemic, it leaves less hope for peers. India’s banks may have shed the overhang of legacy bad loans, but a new bad loan cycle awaits them in the wake of the pandemic. The fall in HDFC Bank shares and the broad market on Monday perhaps indicates that this concern has caught on.

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