Growth may slow down in a difficult environment, but the bank’s cautious approach to lending will pay off.
Even in a tough credit environment, HDFC Bank has managed to keep its loan book relatively clean. If the asset quality has been slightly worse in the September 2008 quarter than it was in June, it’s because of the continuing effect of the Centurion Bank merger.
But with gross NPLs at 1.6 per cent and net NPLs at 0.6 per cent, having risen by just about 10 basis points sequentially, there’s nothing to worry. A deteriorating economy will no doubt mean some increase in NPLs, especially in the retail portfolio. But HDFC Bank has traditionally had the cleanest book in the business and should be able to keep it that way.
In fact, even in a difficult credit market, it’s been business as usual for the bank. While a comparison of numbers with the year ago period is not valid because of the merger, an apple to apple comparison shows that both the loan book and deposits have grown at around 30 per cent during the September quarter.
Moreover, it’s been a profitable time for the bank because the net interest margin has risen to 4.2 per cent from 4.1 per cent in the June 2008 quarter; that’s because while the weighted average cost of funds has gone up, the increase has been passed on to customers. The bank manages to keep its cost of funds in check by maintaining the share of cheaper current and savings account (CASA) deposits at just short of 45 per cent.
HDFC Bank’s operating profit for the quarter has risen an impressive 36 per cent y-o-y, though this is not a valid comparison.
Traditionally, HDFC Bank has grown at 30 per cent; however, the unprecedented credit crunch and a slowing economy could compel it to be cautious.
Since the bank has an equal exposure to both corporate and retail sectors, it will be relatively better off than some of its peers, which have focussed more on the retail space. A slower pace of growth doesn’t matter. If the bank has all along commanded the highest valuations in the sector, it’s because of its careful approach to lending. That will pay off now.
