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HDFC Bank Q1 result: Key highlights

Publish Date: 25th July, 2018

HDFC Bank reported its lowest earnings in five quarters, reporting an 18.17% (YoY) growth in net profit for the quarter ended June.

The bank said their earnings took a hit owing to a decline in the value of their bond investments.

The bank also reported a 20 bps squeeze on their net interest margin (NIM). We feel the margin pressure is likely to persist for a few more quarters. That’s because getting CASA (current account, savings account) share gains is not a short-term project. Plus, the bank is yet to re-price its fixed-rate loans on the retail side.

The bank may have increased its share of unsecured loans, but that has not helped in reducing the margins pressure.

Unsecured loans: Comfortable, yet risky

The contribution to unsecured loans to total loans has increased from 22% in FY2014 to 30% now. Rise in personal loans and credit cards were the contributing factor for the increase in unsecured loans.

Given the company’s ambition to remain ahead of industry-average loan growth, there are some reservations in the street. The market is questioning whether the unsecured loan growth is healthy for the country’s largest private lender (by market capitalisation).

This is why our team decided to look into the bank’s unsecured loan business.

Our internal estimate suggests profitability in this business. But do note that we made this estimate by looking at the financials of SBI Cards and Payment Services. Our study suggests that the credit card and personal loan vertical’s contribution can be between 25-30% of the bank’s profit before tax (PBT).

However, all of this can turn pear-shaped quickly. With the risk exposure being so high, such businesses can go downhill quite quickly. In short, the bank will need to tread cautiously and ensure it doesn’t kill the golden goose.

Slight increase in NPAs

Gross non-performing assets (NPAs) saw a slight increase — from 1.30% last quarter to 1.33% now.

The net NPA ratio also increased marginally from 0.40% last quarter to 0.41% now.

On an absolute basis, gross non-performing loan (GNPL) increased by 32% (YoY), which has put further stress on net margins. That’s because the GNPL spike is higher than the bank’s loan growth (22%).

HDFC has also set aside a larger fund to offset any future losses. The bank’s provisions increased by 4.5% in the year-ago period.

Dip in interest income

The bank may have reported a 15.4% (YoY) increase this quarter, but the figure was below the market estimate. The bank later issued a statement, saying a change in their bond portfolio was the key reason for the below-par interest income.

The other reason is the bank’s decision to increase the lending levels to corporates. Since the interest in the corporate debt is lower than retail debt, the bank’s interest earnings has taken a slight hit.

Other highlights

- The non-interest revenue grew by 23% (YoY).

- The bank reported treasury losses of Rs 0.8 billion.

- CASA ratio down by 180 bps (QoQ) to 42%.

- Cost-income ratio dropped by 70 bps (YoY).

- The bank added only 17 branches in the first quarter. To give perspective, the bank had opened 195 and 506 branches in FY2016 and FY2015 respectively.

To sum up, in addition to margins compression, we feel there are short-term concerns for the bank’s revenue growth. Increased competition in the retail space and change in product mix are two factors that can drag down the bank’s earnings in the short term.

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