HDFC Bank net up 20%, a tad short of expectations

Yet, operationally, a good quarter, with a pick-up in retail loan growth, steady margins, asset pressure under control

HDFC Bank, the country’s second largest private sector lender, reported a 20.1 per cet rise in net profit to Rs 2,382 crore for the July-September quarter, as compared to Rs 1,982 crore in the year-ago period.

The net profit was 1.9 per cent lower than the Bloomberg consensus estimate of Rs 2,427 crore. Yet, the results were good. The performance was helped by strong growth in net interest income (highest since the March 2013 quarter), net interest margin (NIM) expansion and good loan growth.

The stock ended Tuesday up 0.1 per cent at Rs 895.90 on the BSE versus the benchmark Sensex’s 0.6 per cent rise. It is trading at 3.5 times the FY16 estimated earnings, closer to its historical average one-year forward price/book ratio.

Weakening systemic loan growth, which has pulled down the overall loan growth, was one reason for lower net profit growth, higher provisioning being the other. Provisions and contingencies jumped 18 per cent over a year before to Rs 456 crore in the quarter. Sequentially, though, provisioning was down 5.6 per cent, an indication that asset quality pressure might be easing.

This was the fifth quarter in a row when the annual rise in quarterly profit after tax was below 30 per cent. In fact, it was barely above 20 per cent. The rise in quarterly net profits had exceeded 30 per cent (year-on-year) for about a decade, till the first quarter of 2013-14.

Paresh Sukthankar, deputy managing director, said in a conference call, "The growth rate and profit have to be seen in the context of the environment and the growth in the banking sector as a whole. High net profit growth is not the only parameter.”

Banking sector credit growth has been slowing and asset quality pressures have been on the rise for most banks.

For the quarter, HDFC Bank’s NIM was 4.5 per cent, up from 4.3 per cent at the end of the September quarter last year. Sukthankar said the stable share of current and savings account deposits at 43.2 per cent and better retail loan growth, along with lower NIM in the September 2013 quarter, aided margin expansion.

Analysts believe NIMs could remain stable at current levels and offer little upsides. Vaibhav Agrawal, vice-president of banking research at Angel Broking, says: "HDFC Bank has maintained net profit growth of 20-25 per cent in the past few quarters, on the back of stable margins and other levers. However, NIMs appear to be at peak levels and offer limited scope for upside. Thus, pick-up in overall environment and loan growth is a pre-requisite to see meaningful uptick in the bank's net profit growth. Otherwise, earnings growth will come down to meet loan growth."

Overall advances during the quarter grew 21.8 per cent y-o-y to Rs 3.27 lakh crore, in line with analysts' expectations, adjusted for Foreign Currency Non-Resident (Bank) loans. Loan growth was 18 per cent and retail loans grew 17 per cent. Strong rises in automobile and personal loans fuelled retail loan growth; retail loans account for a little over half the bank’s loan book.

Wholesale loans were largely working capital-related and the management believes material improvement in capital expenditure on new projects is still a few quarters away. Deposits increased by 24.8 per cent to Rs 3.9 lakh crore in the quarter, in line with analysts' expectations.

Asset quality continued to be stable, with some improvement visible. Gross non-performing assets (NPAs) were 1.02 per cent of gross advances as compared to 1.09 per cent in the September quarter last year. Net NPAs were unchanged at 0.3 per cent, both on a year-on-year and sequential basis. “We are very comfortable with our asset quality now. Small and medium enterprises, commercial vehicles and construction equipment segments were seeing pressures in asset quality but there has been improvement from these sectors sequentially,” said Sukthankar.

Net interest income, the difference between the interest earned and expended, was up 23.1 per cent over a year to Rs 5,511 crore, due to strong loan growth. Other income (fee, trading profit and miscellaneous income) in the quarter grew 11 per cent to Rs 2,047 crore, led by 13 per cent growth in fee income.

At the end of the September quarter, the capital adequacy ratio was 15.7 per cent, according to Basel-III norms. The tier-I CAR was 11.8 per cent. Sukthankar said they'd sought shareholders' approval to raise more infrastructure bonds in the coming months; the amount is yet to be decided.