HDFC Bank Ltd.

NSE: HDFCBANK | BSE: 500180 | ISIN: INE040A01034 |Industry: Banks
|Expensive Performer
1505.75 12.20 (0.82%)
NSE Dec 01, 2021 15:19 PM
Volume: 4.1M
 

HDFC Bank Ltd.    
25 Oct 2021
1505.75
0.82%
HDFC Bank finds firmer ground in September quarter

By Suhani Adilabadkar

HDFC Bank stock price gained more than 2% ahead of its September 2021 quarter results on October 14, 2021. After a muted Q1FY22, investors were relieved as the bank reported higher retail loan growth, consistent commercial & rural banking growth momentum, robust CASA ratio, and stable deposit base growth in Q2FY22. Post the result announcement, the stock price touched its 52-week high of Rs 1,725. 

After the June 2021 quarter scare when NPA ratios deteriorated both YoY and sequentially, the September 2021 quarter numbers were reassuring in terms of asset quality, pleasing investors and analysts alike. The management’s commentary indicating growth pick-up across retail, rural and commercial business segments also enthused the street. With the festive season now in full swing, HDFC Bank is back with familiar aggression, and energised by the removal of the RBI ban on the issuance of its credit cards. 

Quick Takes

  • HDFC Bank issued 4.16 lakh credit cards in Q2FY22 after the RBI ban was lifted in August 2021 vs ICICI Bank’s 7 lakh credit card addition 

  • The bank aims to grow its rural banking and wholesale small and medium enterprise (SME) business by 20-25% and 50% YoY respectively in FY22

  • Higher retail push and revival of credit card business is expected to increase net interest income growth and expand net interest margin in the near future

  • Core annualized slippage ratio improved to 1.8% in September 2021 quarter on a quarterly basis compared to 2.54% in the June 2021 quarter 

  • HDFC Bank plans to open 400 branches in the coming quarters

HDFC Bank returns to  growth in September 2021 Quarter

After reporting its lowest ever YoY net interest income (NII) growth of 8.6% YoY in Q1FY22, HDFC Bank is back to double-digit growth. Net interest income (interest earned less interest expended) grew by 12% YoY to Rs 17,684 crore in Q2FY22 from Rs 15,776 crore, a year ago. Higher NII was aided by strong retail book growth (up 13% YoY) and stable net interest margin (NIM). 

NIM remained stable at 4.1% in the September 2021 quarter. Net profit came in at Rs 8,834 crore for quarter ended September 30, 2021, rising 18% YoY and 14% sequentially.  Higher profitability was reported despite additional contingent provision of Rs 1,200 crore in Q2FY22 for de-risking the balance sheet.

Overall provisions and contingencies rose 6% YoY to Rs 3,925 crore in September 2021 quarter (down 23% QoQ.) Higher provision coverage ratio of 71% and aggregate contingent provision of Rs 7,760 crore provides robust support to asset quality.  Improved collections and lower slippages led to sequential improvement in asset quality in Q2FY22. Gross NPA ratio (percentage of gross NPAs to gross advances) and Net NPA ratio (percentage of net NPAs to net advances) came in at 1.35% and 0.40% and improved 12 and 8 basis points (bps) QoQ respectively in Q2FY22. 

Current account and savings accounts (CASA) ratio surged to 46.8% in the September 2021 quarter compared to 41.6%, a year ago. CASA deposits at Rs 6,58,232 crore rose 28% YoY driven by savings account deposits and current account deposits growth by 30% and 26% YoY respectively in September 2021 quarter. Total deposits (up 14.4% YoY) and advances (up 15.5% YoY) were at Rs 14.06 lakh crore and Rs 11.99 crore as on September 30, 2021. 

 

Improved asset quality, restructured book a key monitorable

As the second wave subsided, lower slippages, higher collections and recoveries improved HDFC Bank’s asset quality in the September 2021 quarter. According to the management, recoveries for Q2FY22  were 10% higher than pre-Covid levels and were 20% higher YoY for the month of September 2021. 

Core annualized slippage ratio (fresh NPAs) also improved to 1.8% for the September 2021 quarter on a quarterly basis compared to 2.54% in the June 2021 quarter. Provisions rose 6% YoY and declined 23% QoQ, and consequently credit cost fell 37 bps sequentially, reported at 1.30% in Q2FY22, compared to 1.41% in Q2FY21 (Credit cost is the percentage of provisioning against total advances. A fall in credit costs enhances the lending capacity of banks). 

Though all these parameters are encouraging, analysts are keenly watching HDFC Bank’s restructured book which was around Rs 18,000 crore for the quarter ended September 30, 2021. Restructured loan book rose to 1.5% of advances in the September 2021 quarter, compared to 0.8% in the previous June 2021 quarter. Speaking on the bank’s restructured book, Jimmy Tata, Chief Risk Officer at HDFC Bank said, “Our restructured portfolio is under heightened monitoring at all points in time.” He added that the impact of the restructured book will not be more than 10-20 basis points on the bank’s NPAs at any given point in time. 

Retail loan book growth re-invigorated, commercial & rural banking maintains momentum

According to the recent CRISIL report, the retail segment of the Indian banking industry is expected to report growth in its mid-teens in FY22, after a muted FY21. For HDFC Bank as well, the retail segment has turned a corner. Retail loan segment is back to double-digit growth after five quarters. Retail loan book at Rs 4,82,942 crore grew 13% YoY in September 2021 quarter.

The retail loan book mix fell to 40% of the total loan book in the September 2021 quarter, from 50% in Q4FY20. As the pandemic induced a cautious stance among customers, leading to slow consumption and high savings, HDFC Bank shifted its focus towards its low-yield wholesale/corporate loan book. But in the present scenario, as the economy picks up, the bank has also got back on the retail track. 

Speaking on retail book growth, Srinivasan Vaidyanathan, CFO at HDFC Bank said that after a transition period of 6-8 quarters from retail to wholesale, the retail book is now at an inflection point. He further added that, “The retail segment is now starting to pick up and at least the momentum on the retail is more than wholesale.” All retail product segments reported positive growth in Q2FY22. Personal loans, where the bank is in a market leadership position, grew 12% YoY. The bank’s personal loan portfolio entirely constitutes salaried individuals and belong to high-rated government and private enterprises. The bank is confident of maintaining its double-digit growth momentum for personal loans in the coming quarters.

Auto loans are also witnessing strong traction and growing at a healthy pace. Arvind Kapil, Country Head-Retail Assets said, “The domestic vehicle sales units witnessed a drop at an industry level of 37% for September 2021 over September 2020. However, our incremental auto loan disbursal in value terms increased by 36% during the same period.” In the auto loan segment (up 6.3% YoY), which includes both 2 & 4 wheelers, HDFC bank’s market share is around 25-30% in the OEM category. In the retail commercial vehicle category, vehicles financed in Q2FY22 grew 4.5x YoY compared to 1.2x of industry growth. Home loan segment and loans against property (LAP) grew 20% and 12% YoY respectively in Q2FY22. Home loans constitute roughly half of the aggregate banking sector loan book. Lower home loan rates, lower real estate prices and work from home trend is expected to drive the home loan segment for banks in the near future.  

RBI lifted restrictions on HDFC Bank for issuance of new credit cards in August 2021, a key positive development before the festive season. According to the management, 4,16,000 cards were issued over the past five weeks and the bank aims to sustain this momentum. Credit card spend grew 36% YoY and 27% sequentially in the September 2021 quarter. For the first 10 days of October 2021, growth in card spends is around 42% compared to the similar period last year driven by festive spend. The bank recently re-launched its Millenia, Infinia Metal, Freedom credit card offerings and tied up with Paytm. Partnership with Paytm will augment HDFC Bank’s credit card acquisition by utilizing the former’s merchant base. 

On an overall basis, incremental retail disbursements grew 50% QoQ and 71% YoY in the September 2021 quarter. As the high yielding retail loan segment gathers pace, net interest income and net interest margin will witness expansion, driving higher profitability for HDFC Bank in the coming quarters.  

HDFC Bank carved out a commercial and rural banking segment in July 2021 to focus on rural India and consolidate its position in micro, small and medium enterprises (MSME) businesses. Commercial and rural banking (Rs 3,59,020 crore) which constituted 30% of total loan book grew 29% YoY and 7% sequentially in Q2FY22. Rahul Shukla, Group Head, Commercial Banking & Rural Business said that rural banking opportunity space is around Rs 15 lakh crore. He further added, “We are a small proportion of that. If you split that between secured and unsecured lending, we would be about 10-11% of the secured lending.” 

With a strong government focus on the rural ecosystem, there is a long runway for growth for HDFC Bank. On the same lines, the bank also aims to enhance its MSME business which currently constitutes 1.5 crore MSMEs out of a total 6.5 crore MSMEs in India. This opportunity in this space is around Rs 20 lakh crores, said Shukla. 

On the wholesale segment, the HDFC Bank management expects government spending on infrastructure and pick-up in capacity utilisation, currently lower than 70%, to drive growth in the near future. The corporate & other wholesale segment (Rs 3,12,423 crore) grew 6% YoY but was flat sequentially in the September 2021 quarter.

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