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HDFC Bank’s decade-plus record of over 30 per cent growth in each quarter’s net profit is likely to break. A look at consensus Bloomberg estimates suggests this (at Rs 8,424 crore) in 2013-14 will be only 25.2 per cent more than last year.
The consistent 30-plus per cent annual profit growth is among the key reasons why the stock trades at premium valuations. Other reasons include robust asset quality, high return ratios and high net interest margins (NIMs). That last parameter is aided by a strong deposit franchise, helping sustain a high Casa (current and savings accounts) ratio, of a little over 40 per cent of the total. Even in the slowdown period of 2008-09, it delivered 41 per cent growth in net profit to Rs 2,249 crore.
Now, the sector faces prolonged slowdown in the economy, high interest rates, tighter liquidity and a weaker rupee. So, the demand for loans has slowed and asset quality is under severe pressure. Analysts believe HDFC Bank will not remain insulated and profit growth will get impacted.
“We believe the NIMs are likely to face the risk of compression for three reasons -- retail business is witnessing headwinds from slow business growth and rising competition, shift to housing loans will be a further NIM-dilutive business and the average cost of replacement of existing term deposits is likely to be more than 25 basis points,” says a recent report from Kotak Institutional Equities.
Notably, treasury income is also expected to be muted. The June quarter profit was boosted by a three-fold rise in this to Rs 200 crore. Adjusted for these gains, net profit would have grown 22 per cent.
Manish Chowdhary, director (and financials analyst) at IDFC Securities, says rates are meaningfully higher and some pain should be there in the September quarter on treasury income. “While there is a high possibility of treasury loss, things could change post the RBI monetary policy (on September 20). Loan growth is expected to be around 21 per cent for FY14, lower than the 25-30 per cent witnessed earlier”. Chowdhary estimates FY14 net profit at Rs 8,632 crore, a 28.3 per cent growth over FY13.
The consistent 30-plus per cent annual profit growth is among the key reasons why the stock trades at premium valuations. Other reasons include robust asset quality, high return ratios and high net interest margins (NIMs). That last parameter is aided by a strong deposit franchise, helping sustain a high Casa (current and savings accounts) ratio, of a little over 40 per cent of the total. Even in the slowdown period of 2008-09, it delivered 41 per cent growth in net profit to Rs 2,249 crore.
Now, the sector faces prolonged slowdown in the economy, high interest rates, tighter liquidity and a weaker rupee. So, the demand for loans has slowed and asset quality is under severe pressure. Analysts believe HDFC Bank will not remain insulated and profit growth will get impacted.
“We believe the NIMs are likely to face the risk of compression for three reasons -- retail business is witnessing headwinds from slow business growth and rising competition, shift to housing loans will be a further NIM-dilutive business and the average cost of replacement of existing term deposits is likely to be more than 25 basis points,” says a recent report from Kotak Institutional Equities.
Notably, treasury income is also expected to be muted. The June quarter profit was boosted by a three-fold rise in this to Rs 200 crore. Adjusted for these gains, net profit would have grown 22 per cent.
Manish Chowdhary, director (and financials analyst) at IDFC Securities, says rates are meaningfully higher and some pain should be there in the September quarter on treasury income. “While there is a high possibility of treasury loss, things could change post the RBI monetary policy (on September 20). Loan growth is expected to be around 21 per cent for FY14, lower than the 25-30 per cent witnessed earlier”. Chowdhary estimates FY14 net profit at Rs 8,632 crore, a 28.3 per cent growth over FY13.
Queries to the bank’s spokesperson via email and telephone calls went unanswered.
The bank’s revenue (net interest income plus other income) growth has been lagging its net profit growth in the past two quarters, reflecting weakness in earnings quality. Net interest income growth has been lower, at 12-28 per cent, in the past 10 quarters; it was above 25 per cent only thrice in this period. Fee income growth moderated to 11-12 per cent in the past two quarters, indicating weakening core income growth. While analysts are still working on estimates for the September quarter, most of them believe the bank will miss the 30 per cent growth in net profit.
Going forward, too, the revenue growth is expected to be under pressure as all banks chase the relatively stable and only growing portfolio, of retail lending. Krishnan ASV, banking analyst at Ambit Capital, says, "We expect the retail lending segment (54 per cent of the bank’s loan book) to be tightly contested, with aspirants such as Axis Bank, IndusInd Bank and YES Bank seeking to aggressively build their retail asset portfolios. We believe the emergence of credible challengers would gradually narrow the 20-25 per cent valuation gap HDFC Bank enjoys over peers."
At Rs 643, the HDFC Bank scrip trades at 3.6 times its FY14 estimated adjusted book value, slightly higher than its historical average of 3.5 times. Most brokerages remain positive due to its consistency and superior asset quality but analysts believe the bank and its investors will have to settle for lower growth in tougher times like these.
