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India’s most valued lender HDFC Bank Ltd strengthened the case for its premium valuation with strong Q4FY21 results. However, the advent of the new financial year has been tough and can weigh on growth.

The bank reported an 18% growth in its net profit despite an increase in provisions in the March quarter. The net profit growth was powered by a 20% rise in operating profit, which in turn was because of a healthy 14% loan growth. The retail loan book grew by 7%, while the corporate loan portfolio expanded by a faster 21%.

However, before investors cheer the lender’s March quarter figures, they should note that year-on-year metrics may hide niggling troubles because of the low base of last year.

Sarvesh Kumar Sharma/Mint
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Sarvesh Kumar Sharma/Mint


What’s more is that investors should now focus on the outlook in the wake of the second wave of coronavirus infections and the imposition of lockdowns across the country.

Lockdowns not only disrupt loan growth but also impact collections. Early signs of asset quality impact are already visible for HDFC Bank. In a call with analysts on Saturday, the management said that cheque bounce rates have increased in April.

“This will be a key aspect to watch as it will impact credit costs as well as the appetite for growth, especially as covid cases have been rising sharply," said analysts at Jefferies India in a recent note.

For the March quarter, though, the lender reported gross bad loan ratio of 1.32%, which captures the true picture of asset quality given that judicial standstill on bad loan recognition has been lifted.

The bank’s retail loan book growth has plummeted in FY21 because of the pandemic. Its retail operations were also dented after the Reserve Bank of India penalized the bank by barring it from issuing fresh credit cards.

The share of credit cards in the overall retail book is 6%. However, the portfolio had shown robust growth every quarter and the regulator’s penalty has meant that growth has been hit to some extent.

The penalty was levied because of frequent digital outages at the bank and the technology audit is yet to be concluded. This would be an overhang on the stock.

That said, HDFC Bank’s metrics have been improving steadily every quarter in FY21. Its most troubled aspect in terms of growth, the retail loan book, has also bounced back to normalcy.

Analysts at Jefferies India Pvt. Ltd point out that retail loans grew by 5% sequentially, higher than the growth in preceding quarters. The HDFC Bank stock fell 1% on Monday, lower than the drop in many of its peers.

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