HDFC Bank that had surprised the market pleasantly, by reporting strong growth in loans and deposits, two weeks ago, had lifted June quarter earnings expectations among investors and analysts. The bank’s first quarter results of the current fiscal, amid the pandemic led crisis, has delivered on most expectations and given the market enough to cheer.

In a quarter when the actual impact of the Covid led lockdown on the business was felt, HDFC Bank’s resilient performance is noteworthy. The bank has reported 21 per cent growth (YoY) in loans in the June quarter, driven by a tidy 38 per cent growth in corporate loans. It would appear that lending to the SME segment under the credit guarantee scheme and a relatively lower base in the June quarter of last year, have driven the growth in the corporate segment. However the growth in the retail segment as expected has been modest at 7 per cent, with the ongoing slowdown in the economy leading to lower retail loan demand.

Interestingly, the bank’s net interest margin remained stable at 4.3 per cent in the June quarter, despite the slowdown in growth of high yielding retail loans. The strong traction in deposits (24.6 per cent growth), lower cost of funds, alongside robust growth in corporate loans appears to have aided margins.

On the profit front, while the additional provisions (owing to Covid) were expected to weigh on earnings a bit, the bank has managed to report a healthy 19.6 per cent growth in profit after tax. HDFC Bank was among the few private sector banks that had made tidy Covid-related provisions in the March quarter (₹1,550 crore); in the June quarter, the bank has made additional ₹1,000 crore contingent provisions and also accelerated recognition of NPAs, based on its assessment of the ongoing situation. The bank’s GNPA stood at 1.36 per cent of loans in the June quarter as against 1.26 per cent in the March quarter.

That said, the huge uncertainties around the Covid situation and the impact it has on future defaults needs to be seen. The management in its results note has stated that the continued slowdown may lead to a rise in the number of customer defaults and the extent to which the pandemic will impact the bank's results will depend on future developments, which are highly uncertain.

As such, HDFC Bank’s credit cards and personal loans constitute 35 per cent of retail loans, which is relatively higher than the exposure that its peers such as Axis and ICICI Bank have to these unsecured loans. While job losses could increase the risk of defaults in unsecured consumer loans, with chunk of HDFC Bank’s unsecured loans to salaried employees, in good and strong corporates, the risk of default is mitigated to a lot extent.

Strong fundamentals

While the bank’s core performance and asset quality trends will be keenly watched in the coming quarters, steady market share gains, strong capital ratios and superior operational performance, should continue to drive valuation.

HDFC Bank has steadily gained market share over the past five years. From 7-odd per cent in FY16, HDFC Bank’s share in overall loans (non-food credit) has gone up to over 10 per cent in FY20. The bank’s well-balanced loan mix has helped it deliver a healthy growth despite challenges within retail and corporate segments in certain periods.

For instance, while in FY17 and FY18, the bank’s loan growth was led by strong traction in retail loans (as growth in corporate loans slowed), in FY19, corporate loans drove the overall loan growth.

In FY20 too, as retail loan slowed led by weakness in the auto and CV/construction equipment segments, strong corporate loan growth kept overall loan growth in good stead.

In the latest June quarter also, the slowdown in retail loans has been led by segments such as auto (-1 per cent YoY), two- wheeler (-4.9 per cent) and CV/construction equipment (-4.9 per cent).

The bank holds floating provisions of ₹1,451 crore and contingent provisions of ₹4,002 crore (as of June 2020) which lends comfort. The bank is also well capitalised to fund growth over the medium term. The bank’s total capital adequacy ratio stood at 18.9 per cent as of June 2020; Tier 1 capital adequacy stood at 17.5 per cent.

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