HDFC Bank Q4: Steady performance, but early signs of Covid-led disruption evident

With the Covid-19 threat on the rise, impacting growth of businesses over the past month, investors have been particularly anxious over the performance of banks and other financial institutions that are likely to face significant headwinds in the coming months.

While HDFC Bank delivered a steady performance in the latest March quarter, there are evident signs of the coming challenges for the bank and other players in the ensuing quarters.

HDFC Bank delivered 21 per cent YoY growth in loans in the March quarter. Its profit grew by 17.7 per cent, and the bank continued to sport healthy capital ratios and steady asset quality.

However, the management has stated that the lockdown coming into effect in the latter half of March has impacted the bank’s business — in terms of loan originations, distribution of third party products and payments product activities, collection efforts .

The bank’s provisions also spiked to ₹3,784 crore in the March quarter — doubling from the level seen in the same quarter last year. The provisions include contingent provision of ₹1,550 crore relating to Covid-19.

Loan growth and earnings are likely to take a significant hit in the June quarter (when the actual impact of the Covid-led lockdown on the business will be felt). While HDFC Bank is among the more resilient players with strong fundamentals, it will be critical to see the impact on the bank’s asset quality given its relatively higher exposure to unsecured consumer loans and SME loans.

Key metrics

After delivering a net profit growth of 20-22 per cent through 2019 and 27 per cent in the September quarter, net profit had increased by 33 per cent in the December quarter, led by robust growth in other income. Growth in the bank’s core net interest income had in fact slowed in the recent quarters, despite healthy growth in loans.

In the latest March quarter, while growth in net interest income has inched up to 16 per cent (from 12.7 per cent in the December quarter), other income has fallen sequentially. The management has stated ₹450-crore impact on other income owing to Covid-led disruptions.

On the loan growth front, the bank has been witnessing slowdown in retail loans since FY19, even as corporate loans have led the growth in the bank’s overall loans. In the latest December quarter, loan growth came in at 21 per cent, with corporate loans growing by 29 per cent and retail by 14 per cent. The slowdown in retail loans was led by segments such as auto (4 per cent YoY), two-wheeler (-1.9 per cent) and CV/construction equipment (1 per cent).

HDFC Bank’s bad loans have fallen sequentially, with GNPA ratio at 1.26 per cent (down from 1.42 per cent in the December quarter).

HDFC Bank has granted moratorium to all eligible borrowers. The bank holds provisions against the potential impact of Covid-19. This has led to lower GNPA and net NPA ratios by 10 bps and 6 bps respectively.

The bank also holds floating provisions of ₹1,451 crore and contingent provisions of ₹2,996 crore.

The bank’s strong capital base is a key positive that provides buffer to absorb losses going ahead. The total capital adequacy ratio stood at 18.5 per cent as of March 2020 and Tier 1 capital adequacy stood at 16.4 per cent.