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Three private banks show Q1 is less of a washout, HDFC Bank shines

Outstanding bank loans to industries grew by only 2.7% on a year-on-year basis in September to  ₹27.74 trillion. On a year-to-date basis, these loans were 3.8% lower than in March 2019.  (Photo: Mint)Premium
Outstanding bank loans to industries grew by only 2.7% on a year-on-year basis in September to 27.74 trillion. On a year-to-date basis, these loans were 3.8% lower than in March 2019. (Photo: Mint)

  • India‘s banks saw their loan book shrink in the first quarter, but pain was less than anticipated
  • HDFC Bank’s metrics were better than that of the banking system, as its loan growth touched 21%

A preliminary report by three private banks on their first quarter business shows that the three months ended June haven’t exactly been a washout.

In fact, the largest private sector lender, HDFC Bank, showed its loan growth hardly slid from the historically healthy double-digit growth even during the first quarter. Year-on-year loan growth at HDFC Bank remained at 21%.

What’s more is that the bank’s loan book grew by 1.09% sequentially during the June quarter, belying the weak trend of the sector at large.

Just a week ago, data from the Reserve Bank of India showed that India’s lenders saw their loan book shrink by 1.08% between 1 April and 19 June. To be sure, the first quarter of a financial year is seasonally weak in terms of credit growth.

Even so, the effect of the pandemic cannot be overlooked. Strict lockdowns amid a stubbornly steep coronavirus infection curve has meant that Indians could not spend, let alone borrow for expenditure. Loan books of IndusInd Bank and Federal Bank showed the sector’s pains, shrinking by 3.09% and 0.89%, respectively, compared to end-March.

What then is behind HDFC Bank’s growth?

When a pie shrinks, the way it is sliced becomes different. It is clear that the HDFC Bank has been able to grow its market share in loans during the lockdown. Analysts point out that the bank’s strong franchise as well as its proven historic record of belying the broad trends in growth could also have helped it.

“A strong liability franchise would support margins, and higher liquidity levels would enable the bank to ride out the current crisis and gain higher market share," wrote analysts at Motilal Oswal Financial Services.

The bank has been traditionally big on advancing working capital loans. The need for working capital has been higher among companies during the lockdown as they seek to ride out the crisis. “Working capital cycles have stretched and more companies, especially smaller ones, need such loans. This could be one of the contributors for the bank," said an analyst, requesting anonymity.

IndusInd Bank’s loan book has a relatively greater exposure (~25%) to the auto loans space, where growth has been hit hard. Moreover, the microfinance loan book it got after merging Bharat Financial could also be a pain point. Another factor that sets lenders apart is the size and shape of their balance sheets when the pandemic hit.

HDFC Bank has a high capital adequacy ratio and has managed to maintain its growth momentum. IndusInd Bank has been battling loan growth deceleration for more than a year now.

It is clear that private banks will see a truncated loan growth this year with the first half showing dismal numbers. But among them, some lenders may see more pain than others, simply because they entered the pandemic on a weaker note.

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