HDFC Bank’s Q1 showing gives relief to investors

Lower moratorium, higher provisioning likely to limit impact on asset quality

HDFC Bank’s June 2020 quarter (Q1) numbers, reported last Saturday, offer comfort to investors on the asset quality front with small moratorium book, accelerated recognition of non-performing assets (NPAS), and higher provisioning. Therefore, despite higher bad loans and a sharp fall in retail loan originations in Q1, the stock of HDFC Bank jumped 3.1 per cent on Monday, outperforming the Nifty Bank index, which gained 1.6 per cent.

In Q1, gross NPAS or bad loans were up 9 per cent quarteron-quarter to ~13,773.5 crore, mainly because of the accelerated NPA recognition based on the bank's analytical tool.

Analysts believe this is a prudent step in the current environment. What’s also comforting is the bank’s moratorium book, which is largely from the retail segment, is just 9 per cent — so far, the lowest in the industry. Notably, 97-98 per cent of the customers opting for a moratorium have no overdue and have received their salary.

Rohan Mandora, vice-president at Equirus Securities, says: “A drop in retail loan originations, which is mainly due to the lockdown, is not a big concern for HDFC Bank. In fact, a lower moratorium book of 9 per cent is comforting, though future asset quality trends need to be monitored.” In the current situation, asset quality is important rather than growth, says Mandora, who has lowered the stock’s rating to “add” from “long”, mainly due to rich valuation and the current unprecedented environment. Analysts at JM Financial who have a “buy” rating say: “We favour HDFC Bank for its lower asset quality risks, one of the best cost-efficiency ratios, strong liabilities defence, and high capital base.”

Further, the bank has continued to shore up its contingent provisioning, resulting in a 49 per cent year-on-year increase in bad loan provisions. The management also believes contingent provisions (~4,000 crore; 40 basis point of the loan book) are sufficient to manage the stress. The total provisioning coverage ratio, including general, contingent, and floating provisioning, stands at 149 per cent. Analysts at Motilal Oswal Securities say though slippages will increase during October 2020-March 2021, higher provisioning buffer can limit the overall impact on earnings.

In Q1, higher treasury income, lower operating expenses, and 18 per cent year-on-year growth in net interest income, led by a 21 per cent year-on-year increase in advances, supported the bank’s bottom line. Its profit before tax grew 4.7 per cent year-on-year to ~8,937.8 crore.

The bank has also indicated at an internal successor to Aditya Puri, MD of HDFC Bank, whose tenure ends in October. This has helped partly allay the long-standing concern on leadership change, say analysts.