HDFC Bank: Growing dependence on corporate loans isn't a long-term positive

Yield on advances declined by 133 bps year-on-year in Q3 as mix shifts in favour of corporate loans

Among those which have announced the December quarter (Q3) results so far, HDFC Bank saw the highest earnings upgradation (8– 11 per cent) for FY22 on the back of strong results. In the near-term though, the stock has been a laggard, down six per cent in a week. With high foreign portfolio investor concentration and foreign investors lately turning sellers in emerging markets including India, HDFC Bank stock’s price correction may just be a technical adjustment.

That said, while the results in Q3 exceeded expectations, investors of HDFC Bank have to be mindful that growth lately is coming more from corporate loans rather than the retail segment. In fact, with the loan mix altered to 47:53 in favour of corporate book, as against the near 50:50 mix seen in FY20, the bank may be on course to shed its tag as a retail lender - a factor which fetched it top notch valuations. At 3.6x FY22 book, while HDFC Bank has retained its premium for its ability to grow ahead of the industry, the shift away from retail loans could have its perils.

For one, despite an overall loan growth of 15.6 per cent year-on-year in Q3, the core interest income expanded by only 2.4 per cent year-on-year. Much of the operational outperformance came from lower cost of funds (four per cent in Q3, down 130 basis points or bps year-on-year) and 15 per cent year-on-year increase in non-interest income.

Consequently, the bank’s yield on advances shrunk by 133 bps year-on-year to 8.9 per cent in Q3 and lower by 28 basis points sequentially. Analysts at Prabhudas Lilladher point out the fall in yield is due to faster growth in corporate book compared to retail loans. Over 65 per cent of HDFC Bank’s corporate book is constituted by public and private sector entities with AA and above rating, where pricing power vests with customers rather than with banks. “Also, with well-rated corporates being the focus segment for all banks, HDFC Bank will have to balance competition and growth going ahead,” said an analyst from a domestic brokerage.

As for retail loans, key segments such as auto loans, commercial vehicle loans and business banking loans where HDFC Bank has historically grown ahead of peers remain a laggard. Increased sourcing of home loans (up eight per cent year-on-year) from HDFC Limited and 5 – 10 per cent growth in credit cards and personal loans helped the bank post an overall retail growth of 5.2 per cent year-on-year in Q3. While retail disbursements have lately picked up, Q4 numbers will be watched for granularity in growth.

Until then the growing dependence on corporate loans could put a lid on the bank’s yield.