By Suhani Adilabadkar
With the RBI ban on credit card issuance behind them and sustained loan book momentum, HDFC Bank delivered a stable December 2021 quarter with lower provisions and improved asset quality. The stock price fell 1.5% post the bank’s Q3FY22 results. Though the overall results look good, suboptimal net interest income (NII) growth, flat net interest margin (NIM), and lower core fees disappointed analysts and investors alike. The bank lost some of its sheen in FY21 and Covid-19 turbulence displayed the chinks in its armor. Investors are keenly watching how the largest private sector bank maintains asset quality and augments its retail loan book growth amid the Omicron wave.
- The bank issued its highest-ever credit cards in a quarter at 9.5 lakh in Q3FY22
- Credit costs are expected to be around 100-120 basis points in the near future
- The impact of the restructured book will not be more than 10-20 bps on NPAs
- Slippage ratio (fresh NPAs) improved to 1.6% in Q3FY22 compared to 1.8% in Q2FY22
- Loan book was up 16.5% YoY, driven by commercial & rural banking and retail loan segments in Q3FY22
Stable December 2021 quarter - healthy loan book growth and improved asset quality
HDFC Bank came in with stable Q3FY22 results, aided by strong growth in commercial and rural banking and retail loan segments, and lower provisions. The bank reported net interest income (interest earned less interest expended) of Rs 18,443 crore in the December 2021 quarter compared to Rs 16,318 crore, a year ago. NII growth moderated to 13% in Q3FY22 from a high of 18% Q1FY21.
Srinivasan Vaidyanathan, CFO at HDFC Bank said that moderating NII growth reflects a shift from unsecured lending towards higher rated loan segments during the pandemic. As the pandemic induced a cautious stance among customers, leading to slow consumption and high savings, HDFC Bank shifted its focus from high-yielding unsecured retail loans towards its low-yield wholesale/corporate loan book. This has also impacted net interest margin (interest earned-interest expended/average earning assets) which is stagnant within a range of 4.1-4.3% over the past seven quarters. NIM was flat on a QoQ basis at 4.1% (down 10 bps YoY) in Q3FY22.
The drop in provisions at Rs 2,994 crore (down 12% YoY) aided net profit growth of 18% YoY to Rs 10,342 crore.
The bank also saw collections improve and lower slippages during the quarter, which helped in a sequential improvement in its asset quality. Gross NPA ratio (percentage of gross NPAs to gross advances) and Net NPA ratio (percentage of net NPAs to net advances) came in at 1.26% (up 9 bps QoQ) and 0.37% (up 3 bps QoQ) in Q3FY22.
The bank’s total deposits rose 14% YoY to Rs 14.4 lakh crore. CFO Vaidyanathan said retail deposits constituted about 83% of total deposits and contributed to the entire deposit growth for the bank since last calendar year. Current account and savings deposits (CASA) ratio surged to 47.1% in the December 2021 quarter compared to 43% a year ago. Advances (Rs 12.6 lakh crore) rose 16.5% YoY supported by retail loan book (up 13.3% YoY), commercial & rural banking (up 30% YoY) and corporate loan book (up 7.5% YoY) in Q3FY22.
The retail loan mix needs a rejig
After HDFC Bank released its December quarter 2021 business update on January 4, 2022, its stock price rose 2% due to the strong double-digit loan growth of 16.5% YoY. The market was also enthused by strong CASA growth and retail loan book maintaining September 2021 quarter double-digit growth momentum.
Retail advances constituting 40% of the total loan book grew 13.3% YoY. But retail loan growth is still a cut below industry standards. ICICI Bank has been clocking 20% retail loan growth since the March 2021 quarter. Overly cautious Kotak Mahindra Bank too surpassed HDFC Bank in Q2FY22 in terms of retail loan book growth (up 17% YoY). Speaking on HDFC Bank’s retail loan book, Vaidyanathan said, “It's starting to take its own legs and grow. But it needs time to grow back to where it was two years ago. The journey has started.” As the bank gets its focus back on the high yield retail engine, net interest income and NIMs will hopefully be favourably impacted in the coming quarters.
While private sector banks are expected to log in strong retail loan growth aided by economic recovery and festive demand in the December 2021 quarter, the third wave of the pandemic will weigh on Q4FY22. HDFC Bank’s retail mix mainly consists of personal loans, payment products (credit cards), auto, two-wheeler, and home loans.
Except for two-wheeler segment loans, all other retail segments reported YoY positive growth. High cost of ownership, poor rural sentiment, work from home, and the Omicron uncertainty have impacted two-wheeler sales leading to lower loan disbursals. Till the economic recovery is felt across economic segments, domestic two-wheeler growth will remain muted. Two-wheeler loans (Rs 9,288 crore) fell 11% YoY in Q3FY22, while passenger vehicle (PV) loans (Rs 96,426 crore) were up 8% YoY in Q3FY22, but growth is expected to be adversely impacted in the coming months.
According to the Federation of Auto Dealers Association (FADA) press release, passenger vehicles saw a double-digit fall in retail over the past three months. While entry-level car demand is subdued as customers conserve money for healthcare emergencies, the SUV and luxury segments are hurt by semiconductor chip shortages as these cars have a higher content of semiconductors due to high-end features.
Personal loans (Rs 1.3 lakh crore) and payment products (Rs 0.7 lakh crore) reported 15% and 11% YoY growth in Q3FY22, respectively. Discretionary expenditure will take a hit, as air travel and tourism face regulatory curbs, marriages and events are postponed and shopping malls witness lower footfalls. Thus personal loans and credit cards are expected to log soft growth in the next quarter. To augment its consumer finance business amid Omicron disruption, HDFC Bank signed memorandums of understanding (MOUs) with India Post Payments Bank (IPPB) and Paytm to scale up its business in rural and semi-urban areas. The bank also took steps to enhance the digital experience for its customers through a fully revamped payment offering.
Though growth remains uncertain for auto, personal loan, and payment products segments (25% of HDFC Bank’s loan mix), the mortgage segment is a bright spot for HDFC Bank and the banking sector as a whole. High margin and low-risk mortgages, which include home loans, office premises loans, loans against property, are currently a major growth driver for the banking sector. HDFC Bank’s mortgage share in the total loan book stands at 10.7% in Q3FY22 and 13% in FY21. Mortgages contribute 25% of total advances for Kotak Mahindra Bank and ICICI Bank tops the chart with 35-40% mortgage share in FY21. While the street awaits HDFC Bank’s return to the 2018-era level of 20%+ retail growth, the bank needs to rejig its retail loan mix to adapt to the uncertain Covid-19 scenario.
Asset quality Improves, muted growth in operating profit and core fee income
Brokerage houses have increased their target prices for the industry benchmark on the back of strong key positives in Q3FY22. The commercial and rural banking (CRB) loan book has grown above 25% over the past three quarters. Vaidyanathan said that HDFC Bank aims to focus strongly on the CRB segment which contributes about one-third of the country's GDP. Asset quality parameters are also improving. Slippage ratio (fresh NPAs) stood at 1.6% (Rs 4,600 crore), in Q3FY22 compared to 1.8% in Q2FY22.
Provisions fell 12% YoY and 24% sequentially in the December 2021 quarter. Consequently, credit costs at 95 bps fell 30 bps YoY and 35 bps QoQ. Credit cost is the percentage of provisioning against total advances. The restructured book also moderated to 1.4% of loans in Q3FY22 compared to 1.5% in the September 2021 quarter.
But there are two major concerns. A key efficiency indicator - the operating profit growth rate has been on a decline for the past three quarters.
Lower operating profit in Q3FY22 was due to muted core fee (Rs 5,075 crore) growth at 2% YoY. The muted core fee was due to lower fees on card products, lower over-limit fees, revolver rates and lower credit line utilization by customers which reflected the cautious approach of customers. And all this is intertwined with retail growth and the economy regaining its pace.