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    HDFC Bank posts stable quarter with no major surprises

    Publish Date: October 23, 2018

    The first banks in India were set up during the British rule. Three important banks came together to form the Imperial Bank of India, or what is today called the State Bank of India. In the 1960s, the government took over various private sector banks.

    As the years went by, other new banks were set up, using more modern systems. The aim was to offer better services including internet banking and faster transactions by using computers. One of these was the Housing Development Finance Corporation (HDFC Bank) which started in 1994.

    HDFC Bank scaled great heights, going on to acquire Timesbank in 2000 and Centurion Bank in 2008. Today, HDFC is one of the biggest private sector banks with a pan-India presence.

    Read: Our analysis of HDFC Bank earnings in 2Q19

    Recent performance

    While offering all modern banking services, HDFC has always adopted a cautious approach, keeping risks low. This has helped it perform well in the past and may be the key for it to continue to do so. HDFC announced an increase of 21.2% YoY in its income. The profit after taxes also rose by 20.6% with gross non-performing assets (NPAs) at 1.33%, up from 1.26% a year ago.

    Related read: Our earlier report on HDFC Bank

    Turbulent times for banks

    Major changes and events in India have made it a challenging environment for banks. These include:

    • Capital adequacy requirements as per Basel III norms
    • Recognition norms for NPAs
    • Implementation of Goods and Services Tax (GST) and economic slowdown
    • Demonetisation
    • IL&FS defaults among others
    • Change in value of the Rupee against other major currencies

    All this meant that banks could lend less, and had to keep funds aside to cover potentially risky loans. Along with that banks had to deal with a slowing economy and manage a major default by IL&FS. While HDFC has little direct exposure to IL&FS, it is likely to get affected indirectly.

    Also read: Deposit ownership in banks

    Why add HDFC stock?

    The economy is growing faster after recent regulatory changes despite the increase in fuel prices. The demand for credit is expected to pick up with increased volumes. A good monsoon is also likely to help drive credit growth in rural areas and reduce repayment issues related to agricultural loans.

    A wide range of products with the ability to reduce lending in a sector, while increasing it elsewhere, gives HDFC the flexibility to manage its margins and risk exposure.

    A changing asset mix and increase in margins is also helping the bank generate more revenue. But, HDFC may need to alter the mix to manage risk and move to lower margin businesses.

    While valuations are a lot more comfortable for a positive view on the bank, a rising share of unsecured loans remains a key area of concern given its higher contribution to the bank’s earnings.

    Read: Our article on retail loan growth

      


    Disclaimer: REDUCE rating suggests we expect the stock to deliver -5 to +5% returns over the next 12 months.

    BUY rating suggests we expect the stock to grow around 15% in the next 12 months.

    ADD rating suggests we expect the stock to deliver more than 5% returns in the next 12 months.

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