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HDFC Bank’s earnings bring cheer, but its retail growth remains slow

An Indian private sector bank that sidestepped the corporate bad loan deluge is now hoping to escape from the pandemic’s hammer unscathed. So far, HDFC Bank has been succeeding in its efforts. But it has come with its own costs.

For the December quarter, HDFC Bank reported metrics that beat analysts’ estimates and this may liberate the share price from the 3-month lacklustre state. Net profit grew 15% year-on-year on the back of similar growth in its core income. Its management gave an optimistic outlook to analysts in a post-results conference call on Saturday.

HDFC Bank’s loan book grew by 15.6% in the December quarter, mainly due to the 25% growth in corporate loans.

The retail book has been scarred by the pandemic and growth stayed anaemic at 5.2% year-on-year for the second straight quarter. To be sure, disbursements have jumped every month, according to the management. The fact that the regulator has banned the lender from issuing credit cards until it fixes its digital platform problems has also pressured growth. HDFC Bank has put in place a plan to fix its digital lapses and the bank has apprised the Reserve Bank of India (RBI) of the same.

“The bank is strengthening IT platforms, but easing of RBI restrictions could take time,” wrote analysts at Jefferies India Pvt Ltd in a note. For now, the bank seems to have focussed on keeping collections robust. Collections have returned to 97% in December, close to the pre-pandemic average of 98%.

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HDFC Bank reported a steady loan growth for the December quarter, but its retail book remains under pressure

Meanwhile, the bank is taking advantage of liquidity and government schemes to lend to companies faster than before.

The lender has chosen to lend to strong balance sheets which have an internal rating on a par with external rating of AA, according to the management. The recent quarterly trend in corporate earnings has shown that large companies have been able to safeguard their profitability and in some cases even managed to enhance it despite covid-19. When it comes to small business, HDFC Bank has taken full benefit of the credit guarantee scheme. It has lent around 22,000 crore, taking succour from the fact that the credit risk is taken over by the government for the life of the loan. But it has largely stayed away from version two of the scheme, which focussed on lending to specific stressed sectors.

The bank’s lending decisions show a focus on maintaining future asset quality. Even in the retail book, only 0.5% of it may be restructured, said analysts.

With asset quality outlook looking optimistic, HDFC Bank may continue to command premium valuation since outlook on asset quality is positive. That said, retail loan growth needs to pick up speed for premium valuations to stick.

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