How HDFC Bank Q2 Profit Jumped 27% Despite Lower Growth In Core Net Interest Income

Amid a challenging environment and persisting stress reported by peers, HDFC Bank managed to put up a steady performance in the September quarter. In fact, after delivering a net profit growth of 20-22 per cent in the previous four quarters, the leading private sector bank reported a strong 27 per cent growth in net profit in the September quarter. While this, and the fact that the bank has maintained a stable asset quality, is sure to cheer investors, there may be some less obvious trends that need a watch.

Read more: HDFC Bank Q2 net profit up 26.8 per cent

For one, the boost in net profit can be credited to the robust growth in the other income component. Besides the healthy growth in fee income, other income was also aided by a gain on sale/revaluation of investments in the September quarter, as against a loss in the same quarter last year. But for the boost from the other income component, the significant moderation in growth in the bank’s core net interest income could have impacted earnings. What also drove net profit was the substantial reduction in the effective tax rate in the latest September quarter (29.5 per cent), vis-à-vis last year (34.6 per cent). A sharp slowdown in retail loan growth, fall in net interest margin and a notable shift in the retail : wholesale loan mix - are other key trends that may need to be monitored in the coming quarters.

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Nonetheless, given the happenings in the banking sector, HDFC Bank’s steady asset quality performance and better earnings visibility, is likely to drive the stock’s premium valuations in the medium term.

Retail loan growth slows

After delivering sub-20 per cent loan growth in FY17 and FY18, HDFC Bank had managed a 24 per cent loan growth in the FY19 fiscal. The growth was backed by strong uptick in corporate loan growth, even as retail loan growth slowed considerably.

In the June quarter of the current fiscal (FY20), the bank’s loan growth moderated significantly to 18 per cent, with sharp slowdown in retail credit off-take. In the latest September quarter, the bank managed to report a higher overall loan growth of 20.7 per cent (domestic). But this was led by robust growth of 28 per cent in corporate loans, while the growth in retail loans continued to moderate significantly.

In FY19, the bank had delivered 19 per cent growth in retail loans (down from 27 per cent in FY18). Over the past two quarters, the retail loan growth has slowed down further - 16.5 per cent in the June quarter to 14.7 per cent in the latest September quarter.

The slowdown in retail loans has been led by segments such as auto (flat), two wheeler (1.7 per cent YoY growth), CV/construction equipment (11.7 per cent) and Kisan Gold Cards (8 per cent).

The slowdown in high-yielding retail loans and fall in lending rates could likely have led to HDFC Bank’s net interest margin falling to 4.2 per cent in the September quarter, from 4.3 per cent in the previous June quarter. The bank’s retail:wholesale mix stands at 52:48, a significant deviation from the past few quarters’ trend of 54:46.

However, the steady fall in the bank’s cost to income ratio is a positive - from 44.3 per cent levels in FY16, cost to income has been steadily falling for the bank. In the September quarter it stood at 38.8 per cent, aiding margins.

Asset quality

For HDFC Bank, a healthy growth in loans, has kept the delinquency ratio low, despite rise in bad loans in absolute terms. While the bank’s gross non-performing assets (GNPAs), has been growing at 20-30 per cent (YoY) in the past few quarters, good growth in loans has kept GNPA ratio low. As of September quarter, the bank’s GNPA ratio was a low 1.38 per cent. But the bank has been facing stress in its Agri portfolio.