HDFC Bank’s business update that was released over a week ago, reporting 16 per cent YoY growth in loans—way above the industry growth of 6.7 per cent, and strong traction in low cost CASA deposits, had suggested continued growth momentum for the private lender in the December quarter. In line with market expectations, HDFC Bank has delivered a healthy financial performance, reporting 18 per cent YoY growth in profit in December quarter, aided by healthy traction in corporate loans and trading gains, even as excess liquidity continued to weigh on the bank’s core net interest margin (NIMs).

But there were other key trends and management commentary that were keenly awaited. Post the RBI temporarily halting the bank’s acquisition of new credit card customers and all launches under its Digital 2.0 initiative in December, there have been concerns over the directive’s impact on the bank’s growth outlook and market share. The management post the Q3 results, stated that it is in the process of taking necessary remedial measures to strengthen its digital infrastructure and will update on the progress going ahead. Given that the credit card business has been a key driver of retail loan growth for the bank in recent years, near term growth and valuations could come under pressure, until there is more clarity on this front.

Recent management churn also adds an element of uncertainty. The key to the bank’s premium valuations will lie in tiding over these near term challenges.

That said, HDFC Bank continues to score over other players on its digital and technological drive, overall business momentum, strong operational metrics and higher provisioning buffer.

Impact of credit card business

Over the past few years, HDFC Bank has been gaining market share, amid lacklustre industry growth and challenges, thanks to its diversified loan mix. Hence, even as retail loan growth slowed in FY19 and FY20, strong growth in corporate loans, held the bank’s overall growth momentum. In the first half of the current fiscal too, even as the pandemic impacted retail credit growth, HDFC Bank’s corporate segment continued to deliver strong growth, aiding earnings.

In the latest December quarter, the management stated that retail disbursements have surpassed pre-Covid levels, thanks to the festive season. Corporate loans continued to register strong growth of 25.5 per cent in the December quarter (26.5 per cent in the September quarter).

While retail loan growth picking up is a positive, headwinds in the bank’s credit card business can impact growth in the near term. Since FY18, HDFC Bank’s growth in credit cards has been outpacing that of industry. Even in the first nine months of the current fiscal, HDFC Bank’s credit card has grown at a higher pace than the overall industry growth within the segment.

That said, in the December quarter HDFC Bank delivered a resilient performance, with strong traction in deposits alongside healthy growth in corporate loans aiding earnings. Low cost CASA deposits grew by a strong 29.6 per cent, offering cushion to NIMs. Importantly, the bank’s structurally low cost-to-income ratio is a key positive. In the December quarter cost-to-income ratio stood at 36.1 per cent as against 37.9 per cent for the corresponding quarter last year.

Prudent provisioning

While the bank’s reported GNPA ratio stood at 0.81 per cent, on a proforma basis (if the bank had classified borrower accounts as NPA after August 31, 2020 had it not been for the Supreme Court asset classification standstill), GNPA ratio would have been 1.38 per cent.

However, HDFC Bank has made contingent provisions on such accounts alongside Covid-related provisions. This should provide cushion to earnings if asset quality deteriorates here on. The bank holds floating provisions of ₹ 1,451 crore and contingent provisions of ₹ 8,656 crore as on December.

The bank’s NBFC subsidiary, HDB Financial Services, remains a weak link, which has witnessed uptick in bad loans---GNPA ratio at 5.9 per cent (proforma basis) up from 2.9 per cent last year.

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