HDFC Bank's asset quality has improved, provisions are on the expected lines, and there is a realistic guidance on the COVID-situation and its likely impact on the loan book
HDFC Bank’s second quarter results show overall improvement across key parameters, but there is a high caution over the impact of the COVID-19 pandemic going ahead. Notably, there is a clear shift to wholesale loans, at least going by the loan growth numbers.
The asset quality has improved, provisions are on the expected lines, and there is a realistic guidance on the COVID-situation and its likely impact on the loan book.
Let’s take a look at the NPA (non-performing assets) figures. The gross NPAs in the September quarter declined to 1.08 per cent from 1.36 per cent in the preceding quarter and 1.38 per cent in the year-ago quarter. Net NPAs fell to 0.17 per cent from 0.33 per cent in the preceding quarter and 0.42 per cent in the year-ago period.
Like other lenders which have announced the results so far, HDFC Bank too has followed the Supreme Court interim order barring banks from classifying accounts that are standard as on August 31 as NPAs.
However, the bank has clarified that even if those numbers are adjusted, the bank’s proforma gross NPA ratio and proforma net NPA ratio would have been 1.37 per cent and 0.35 per cent, respectively, which is almost in line with the preceding quarter.
The bank has disclosed that loans worth Rs 15,743 crore were put under the moratorium and the benefit was extended (post May) to loans worth around Rs 4,639 crore. The bank made a total provision of Rs 620 crore on these loans.
The bank has guided that there is a likelihood of higher NPAs and resultant provisions ahead even with slight improvement in the economic situation.
Clearly and expectedly, the COVID-19 pandemic has impacted the business. While there has been some improvement in economic activities during the current quarter, the continued slowdown has led to a decrease in loan originations, the sale of third-party products, the use of credit and debit cards, and the efficiency in collection efforts, the bank said.
“The slowdown may lead to a rise in the number of customer defaults and consequently an increase in provisions,” said the bank.
Loan growth tilts to wholesale
A look at the loan growth data of the bank in the quarter shows a strong focus on the wholesale book. While the domestic retail loans grew by just 5.3 per cent, the domestic wholesale loans grew by an unusually high 26.5 per cent in the quarter. Total advances as of September 30, 2020, were Rs 1,038,335 crore, an increase of 15.8 per cent over September 30, 2019. Domestic advances grew by 15.4 per cent over September 30, 2019.
The lender has taken adequate precaution against the likely impact on the books on account of the pandemic. The Bank held floating provisions of Rs 1,451 crore and contingent provisions of Rs 6,304 crore as on September 30, 2020. Total provisions were 195 per cent of the reported gross NPAs or 154 per cent of proforma gross NPAs as on September 30, 2020.
Overall, the bank has had a good quarter in a tough business environment; also the last quarter earnings before the retirement of Managing Director Aditya Puri, who will hang up boots later this month.Puri is handing over the charge to Sashidhar Jagdishan on a strong note. For Jagdishan, however, there are tough days ahead.