At first glance, the strong loan growth of 23 per cent in HDFC Bank in the December quarter is heartening; as it is almost eight percentage points higher than the overall credit growth in the banking sector. But there are many weak links in the chain.
One, HDFC Bank raised $3.4 billion through FCNR deposits under the special swap facility offered by the RBI.
This is almost 10 per cent of the entire amount raised by all banks through this facility.
To sweeten the deal for the depositor, banks offered a leveraged product under this scheme.
This meant extending an overdraft to the NRI depositor, with a lien on his deposit.
This leveraged product drove HDFC Bank’s growth in overseas loans. Excluding this, the total loan growth is actually four percentage points lower, at 18 per cent for the December quarter.
As the yields on such loans are lower than that earned on domestic loans, the net interest margin has come down by 10 basis points sequentially.
The net interest income, which in the past has tracked the growth in loans, grew by a lower 16 per cent.
Retail loans sluggish Two, growth in high yielding retail loans have slowed down significantly in the last two quarters.
From 25-27 per cent a few quarters back, the retail loan growth has slowed to 13.6 per cent in the December quarter; Axis Bank has, however, continued to deliver stellar growth.
The slowdown in auto loans has impacted most players, and is reflective of the underlying sluggish volumes.
For HDFC Bank, muted growth in home loans has been another dampener. Under the arrangement with HDFC, the bank has the option of purchasing the home loans originated by it.
In the December quarter, the bank bought back only a small amount of home loans from HDFC. Hence the home loan book grew only by 1 per cent.
This is well below the bank’s 18-20 per cent growth in home loans in the past.
Three, it was the spurt in corporate loans that drove the overall loan growth for the bank.
The 22 per cent growth in corporate lending was mainly for working capital financing. This being short term in nature may not be sustainable.
Industry leading growth, steady margins and very low delinquency have justified HDFC Bank’s premium valuation in the past.
Its slowing retail growth and pressure on margins will thus need watching in the coming quarters.