Banking Central | HDFC Bank numbers send a good signal to the industry

File image of HDFC Bank

Signals emerging on the bad loan front in the banking sector are encouraging. The third-quarter earnings report presented by HDFC Bank, the country’s largest private sector lender, in the week gone by showed an overall improvement in the asset quality trend.

The bank’s asset quality improved as the gross non-performing assets (GNPAs) as a percentage of gross advances fell 9 basis points (bps) sequentially to 1.26 percent and net NPAs declined 3 bps quarter on quarter to 0.37 percent at the end of December 2021. One bps is one-hundredth of a percentage point.

During the quarter, the bank made provisions worth Rs 2,994 crore, down 12.3 percent from the year-ago period and 23.7 percent from the previous quarter.  The fall in provisions, the amount banks need to set aside to cover the losses from a loan account, was primarily due to better performance on the asset quality front.

Credit cost, too, came down to 0.94 percent from 1.3 percent in the previous quarter. Total provisions—comprising specific, floating, contingent and general provisions—were 172 percent of the gross non-performing loans as on December 31, 2021. This is broadly seen as a healthy sign.

Provisions indicate a bank’s preparedness to tackle adverse market conditions that could result in potential losses.

Loan growth improving

Along with the improvement in asset quality, loan growth has gained momentum. This was key area analysts were watching as Covid posed major challenges for banks on the growth front.

Loan growth for the quarter gained momentum sequentially and advances were up 16.5 percent year on year and 5.2 percent on a quarter on quarter basis. Retail loans saw a 13.3 percent jump from the year-ago period. The commercial and rural segment saw a healthy uptick of 29.4 percent YoY, while the corporate portfolio was up by 7.5 percent during the period.

Also read: What should investors do with HDFC Bank after Q3 earnings; buy, sell or hold?

Overall, HDFC Bank numbers suggest a positive trend, a good sign for the banking sector.

The Reserve Bank of India’s trend and progress report, too, had captured the improvement in the banking sector asset quality.

The gross non-performing assets of the scheduled commercial banks (SCBs) declined from  8.2 percent at end-March 2020 to 7.3 percent at end-March 2021 and further to 6.9 percent at end-September 2021, the  RBI said in its Trend and Progress of Banking in India 2020-21 report released on December 28.

Also read: HDFC Bank gets growth back in Q3 but fees need a fix

The return on assets (RoA) of SCBs improved from 0.2 percent at end-March 2020 to 0.7 percent at end-March 2021, aided by stable income and decline in expenditure, the report said.

Banks have largely addressed their asset-quality issues in the recent past by way of resolution processes. Some of the large cases have been pushed to the bank, while one-time loan restructuring has helped in several other cases.

In fact, more than the asset quality, weak loan growth was seen as a bigger challenge for the industry amid the coronavirus pandemic-induced crisis.

If HDFC Bank numbers are anything to go by, the banking sector is seeing a gradual improvement in overall loan growth as well. This could very well be an indication of economic activity picking up after a long lull. The sharp rise in the Omicron variant, however, poses fresh challenges.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)