Why HDFC Bank's dip in profit growth may be only a blip

Earlier this week, India's most valued private sector lender, HDFC Bank, fell short of its record of 30 percent average growth by reporting a "mere" 27 percent rise to Rs 1,982.3 crorefor the September quarter due to a slowdown in its retail portfolio.

So, for the first time in 12 years, the bank failed to come close to 30 percent quarterly growth in net profits. In the same quarter a year ago, the bank had reported a net profit of Rs 1,559.98 crore.

"This was partly inevitable as growth slows down - for the bank, as for the economy, and partly precipitated due to the volatile interest rate environment," said IDFC Securities.

The bank's loan growth slowed further to 16 percent from 21 percent in the first quarter of the current fiscal driven by slower growth in all segments.Corporate loans were up 5 percent quarter on quarter, but below industry trends of 7-10 percent.Retail loans grew steadily, up 3 percent quarter-on quarter and 17 percent year on year but were driven more by unsecured loans as mortgage loans were not on-boarded in the second quarter.

Clearly, lower credit growth, tight liquidity conditions, falling GDP growth and rising interest rates are taking a toll on the bank.

During the quarter, net interest margins fell to 4.3 percent from 4.4 percent. This reduction was due to the RBI's tight liquidity measures taken in July. Add to that slowing loan growth and an increase in bad loans. One would surely think this is worrisome considering the stock trades at a huge premium when compared to its peers.

 Why HDFC Banks dip in profit growth may be only a blip


However, the bank's management attributed theslower growth to its conservative approach in booking its entire mark-to-market losses on investments in government securities (G-Secs) in the September quarter itself. Basically,the bank has taken advantage of the recent change in RBI policy and notamortised its losses. During the quarter, yields on government securities jumped as a consequence of liquidity tightening measures by the Reserve Bank of India. The bank posted mark-to-market losses of Rs 135 crore on its bond portfolio.

"Had it chosen to amortise these losses over FY14, the net profit growth would have been above 30 percent YoY," said Daiwa Capital markets in a report.

In fact, the brokerage has even justified the slowdown in loan growth.

1.Though there were someopportunities to lend in the corporatesegment, tight liquidity conditions during the quarter meant that the marginal yield on assets compared to the marginal cost of funding was unattractive from a NIM perspective. Given the increasing cost of funds, it chose to grow its corporate loan book selectively.

2) Underlying demand for certain products, especially in the retail segment, was weak. The management also said that auto loans were impacted by slower car sales and the fact that HDFC Bank holds a fairly large market share there didn't help either.

3) The bank did not buy any home loans from its parent HDFC during the quarter, which resulted in a QoQdecline in its home loan portfolio.

And even though HDFC's loan growth and NII growth have seen a slowdown, its asset quality has stayed stable despite the tough macroeconomic conditions.

At Rs 385.9 crore, provisions and contingencies were largely flat on a year-on-year basis, despite a marginal rise in non-performing assets. The bank attributed this stress on asset quality to the quality of commercial vehicle and commercial equipment loans. Gross non-performing assets (NPAs) increased to 1.1 percent of total advances against 0.9 percent in the second quarter last year. Net non-performing assets were up marginally at 0.3 percent from 0.2 percent in the previous quarter.

During the quarter, net interest income (difference between interest earned and interest expended) grew 15 percent to Rs 4,476.5 crore from Rs 3,882 crore in the same quarter last year, but dipped 25 basis points quarter on quarter driven by higher deposit costs and RBI restrictions on the liquidity adjustment facility (LAF) wind-down.

"The increase seen in the non-performing asset (NPA) front is also acceptable considering the current environment. There is bound to be some amount of disappointment on margins and asset quality but in light of the environment it is not too much to read into," said Vaibhav Agrawal of Angel Broking.

The bank's CASA (current account, savings account) ratio at 45 percent remains strong and mostly stable. A slowdown in current account continues but it was largely compensated by reasonable growth in savings deposits. Most fund managers, however,are bullish on loan advances, which they expect to pick up with the festival season coupled with good monsoon, as the bank has been aggressive in adding branches in semi-urban and rural areas.

Manish Ostwal, banking analyst at KR Choksey, however, expressed concerns about the bank's loan book and margins.

"There are two major worries - loan book growth has been in line with the system, although they had guided for faster growth.. Secondly, margins have declined on a sequential basis. That shows that newer business is being done at lower margins and its ability to pass on costs is not so strong."

Others continue to remain bullish on the stock due to the bank's past performance.

"HDFC bank remains uniquely positioned amongst Indian banks - its strong asset quality and profitability make it a relatively safer stock; however, it also remains amongst the best positioned to benefit from a pick-up in economic growth due to its strong deposit franchise, expanding distribution network, especially rural. We remain positive on the stock, maintain Outperformer," said IDFC Securities.

Daiwai Capital also has an outperform rating on the stock with a target price of Rs 722 as it believes the premium over peers is justified and sustainable, as "HDFC is one of the few non-cyclical banks with a proven track record of achieving a stable NIM and strong asset quality across interest-rate cycles."

Emkay has retained its 'Accumalate' call with a target price of Rs 760 as it believes the structural growth largely remains intact in terms of robust margins, better than industry credit growth, superior capital profile and robust provisions.

"We believe that more than few percentage points on the growth front, what we would value more at this point of time are capitalisation and provision coverage," it added.

"HDFC Bank is best placed among defensives to weather the storm. Hence, we maintain our 'buy' rating on the stock with a price target of Rs 725/ share and have relative preference for HDFC Bank against other defensives," said brokerage Prabhudas Lilladher.

Updated Date: Dec 20, 2014 23:31:37 IST