HDFC Bank's Q1 brings some relief to investors despite higher bad loans

Lower moratorium, accelerated NPA recognition and higher provisioning coverage indicate lower asset quality impact, the bank indicates internal successor of Aditya Puri

HDFC Bank’s June 2020 quarter (Q1) numbers, reported on Saturday last week, offer good comfort to investors on asset quality front with lower moratorium, accelerated NPA recognition and higher provision coverage. Therefore, despite higher bad loans and sharp fall in retail loan originations in Q1, the stock of HDFC Bank gained 3.5 per cent on Monday, outperforming a 1.7 per cent rise in the Nifty Bank index.

In Q1, the banks’ absolute gross non-performing assets (NPAs) or bad loans were up 9 per cent quarter-on-quarter to Rs 13,773.5 crore, it was mainly due to accelerated NPA recognition by the bank based on its analytical tool. Analysts believe, this is prudent steps in the current environment and shows better control on asset quality.  

What more comforting is that the bank’s moratorium book, which is largely from retail segment is just 9 per cent, which is lowest in the industry so far. Notably, 97-98 per cent of the customers under moratorium have no overdue and have received their salary, indicating no major concern.

Rohan Mandora, vice president at Equirus Securities believes that “a drop in retail loan originations, which is mainly due to lockdown, is not a bigger concern for HDFC Bank. In fact, lower moratorium book of 9 per cent is comforting, though future asset quality trends need to be monitored.” In the current situation asset quality is important rather than growth, adds Manodra, who has lowered the stock’s rating to ‘Add’ from ‘long’ mainly due to rich valuations and unprecedented situation.

Analysts at JM Financial with ‘buy’ rating say “we favour HDFC Bank for its relatively lower asset quality risks, one of the best cost-efficiency ratios, strong liabilities defence, and high capital base.”

Further, the bank continued to shore up its contingent provisioning, resulting in to 49 per cent year-on-year increase in provisioning. The management also believes contingent provisions (Rs 4,000 crore, 40 basis point of loan book) are sufficient to manage the stress. The bank’s total provisioning coverage ratio, including general, contingent and floating provisioning, stood at 149 per cent. Thus, according to analysts at Motilal Oswal, though slippages would pick up during October 2020-March 2021, higher provisioning buffer should limit the overall impact on earnings.

In Q1, higher treasury income, lower operating expenses and 18 per cent year-on-year growth in net interest income led by 21 per cent year-on-year increase in advances protected the bank’s bottom-line. Its profit before tax grew by 4.7 per cent year-on-year to Rs 8,937.8 crore.

Finally, the bank also indicated about internal successor of Aditya Puri, managing director of the bank, whose tenure ends in October this year, allaying some concern on leadership change, say some analysts.