Despite headwinds, HDFC bank remains in the sweet spot
HDFC Bank once again turned in high-profit growth of over 20 per cent for the quarter ended March 2019. The country’s second largest private sector lender’s profitability is bumped up by a clutch of factors: sustained increase in core operating performance, robust loan growth of over 24 per cent, net interest margin that continues in the upper band of 4.3 per cent, and prudent operational expenditure.
However, core fee income continues to be below trend, while softening savings accounts growth needs to be watched out for. Also, following long spells of growth, retail credit growth moderated to sub-20 per cent, but considering the marginal stress baggage and strong capital position, the bank continues to be in a sweet spot, say brokerages.
In Q4 of FY19, HDFC’s core operating profit growth softened to 20 per cent, down from 25 per cent in the past couple of quarters due to modest fee income, which saw a sub-10 per cent growth. Overall deposit growth too moderated to 17 per cent as against 20 per cent, while CASA growth at 14 per cent continues to lag industry average. With credit-deposit ratio at a mighty 89 per cent, ramp up in deposit growth will be key to sustain robust loan growth momentum. Within retail loans, auto and two-wheeler loans suffered due to underlying stress, but could track above industry growth. As for commercial vehicles, growth was pretty much in line with industry, and could grow well in FY20, but a slack in FY21 isn’t entirely ruled out.
The bank also retained its cautious stance towards housing finance companies, though there’s no material change in its current portfolio. Fee income was hit due to lower mutual fund distribution -- due to regulatory changes -- and below trend retail asset disbursement growth during the quarter. As the base effect wanes, growth could be back to 16 per cent levels.
On retail portfolio, gross customer acquisition on saving portfolio has been strong but given the wedge between retail term deposits and savings account rates, there was a shift from savings account to retail term deposits, which impacted growth to an extent.
During the just-concluded quarter, slippages stood at Rs 3,577 crore as against Rs 4,000 crore in the previous quarter.
The bank’s asset quality remains benign with headline gross and net bad loans broadly stable at 1.36 and 0.39 per cent. The bank remains cautious on agri portfolio but can capitalise on emerging high-yield opportunities like personal loans and credit cards.
Slippages were lower than the previous quarter, though some elevated pressure is visible in agri portfolio. Given that three states announced farm loan waivers and amid ongoing general elections, the bank took a conservative stance and made generous provisions. Historically, the bank has not been writing off agri NPAs, however, given the retail nature of loans and repeat instances in this segments there would be new policy coming up which will introduce some write-offs.