PremiumIn an environment marked by volatility, HDFC Bank’s steady performance gives much needed comfort to investors.
India’s most valuable lender may have missed the Street’s estimates on net profit, but core performance shone at a time when the pandemic had made it near impossible for anyone to grow.
The 15% growth in operating profit on the back of a stellar 20% growth in the loan book was cheered by investors. The company’s shares rose 3% on Monday, and are now only about 10% lower than their February highs.
What’s more, HDFC Bank chopped its operating expenses to arrive at the taken-for-granted 20% growth in net profit.
But the bank cannot leave the covid-19 battle without scars. Retail loan originations fell by a whopping 70% during the quarter. Credit card sourcing dropped 87%, while card spends declined 44%. The adjoining chart shows the effect of the pandemic on the bank’s loan book.
But growth is not what HDFC Bank is after, according to outgoing chief Aditya Puri. The lender is known the most for its enviable asset quality.
The 1.36% gross bad loan ratio for the June quarter did win points from investors. HDFC Bank reported a drop in borrowers availing moratorium to 9% of its loan book, one of the lowest in the industry. In absolute terms, ₹90,296 crore of the bank’s loan book is under moratorium. Analysts believe the bulk of the moratorium has been in the retail loan portfolio.
The management said that 98% of these accounts have gotten their salary credits, indicating that borrowers availed of moratorium more as precautionary measure rather than an inability to pay. That said, a surge in bad loans, once the moratorium period concludes in August, cannot be ruled out. The lender has beefed up provisions anticipating such risks. It has a contingency provision of ₹4,000 crore and a floating provision of ₹1,450 crore.
But the pandemic is not the only battle for the lender. Finding a successor to Puri, who retires in October, is far more important.
Puri has been at the helm of India’s largest bank since its inception in 1994 and the change comes when the economy is battling an unprecedented recession.
Puri has indicated that the bank’s successor would be from within and that the lender has told the regulator about its preferred candidates. It is in the interest of the bank that the Reserve Bank of India (RBI) gives its nod to a chosen candidate soon.
“CEO succession remains an important event in the near term and a key monitorable," wrote analysts at Motilal Oswal Financial Services Ltd.
HDFC Bank maintained its historic performance on profitability metrics despite the pandemic. For this consistency to be maintained, the lender requires a smooth succession at the top.
