HDFC Bank’s September quarter results had some not-so-good firsts — its net profit grew below 30 per cent in almost a decade and its loan growth underperformed the industry growth.

At first glance, the bank’s slower loan growth, dip in net interest margin (NIM) and increase in bad loans seem worrisome, particularly as the stock trades at a premium to other private sector banks.

But the slower growth is due to the bank’s conservative approach in booking its entire mark-to-market losses on investments in government securities (G-Secs) in the September quarter itself. It could have apportioned it over the next three quarters, making use of the window provided by the RBI. Had it done so, the net profit would have grown at around 30 per cent, like in the past.

That said, the pressure in the banking system due to the liquidity tightening measures initiated by the RBI since July, shows on HDFC Bank’s results, too.

Loan growth

The bank has consistently outperformed the industry’s loan growth in the past, growing 6-10 percentage points higher. But in the September quarter, its loan book grew 16 per cent, lower than the 17.9 per cent growth for the banking sector.

During the quarter, many companies heavily resorted to relatively cheaper bank borrowings instead of bond markets to finance working capital needs. So, why did HDFC Bank not capitalise on this rush?

One, given the increasing cost of funds, it chose to grow its corporate loan book selectively. After the July measures, the bank’s fixed deposit rates went up 75-100 basis points for tenures up to a year, faster than the rise in yields. As normalcy returns to the money markets, the bank should again be able to outperform the industry.

Next, on the retail side, home loans grew only 5 per cent, with the bank not buying back loans from parent HDFC. This impacted overall loan growth by 1-1.5 per cent. Under the arrangement with HDFC, the bank has the option of purchasing back home loans originated by it. The bank expects this to normalise in the coming quarters.

Cost pressures

There has been a 30 basis points decline in NIM over the June quarter. Despite raising its base rate by 20 basis points in August, the bank could not fully offset the cost pressures. This is because only 20 per cent of the bank’s loans are on floating basis. However, as the liquidity measures reverse, margins should recover. Also, with the bank raising $350 million FCNR deposits at around 8.25 per cent through the special swap facility provided by the RBI, the cost of funds should moderate.

The bank’s asset quality slipped somewhat with its gross non-performing assets going up five basis points to 1.09 per cent of loans. But considering the stress in the sector, this is not alarming, as asset quality still remains amongst the best within private banks.

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