HDFC Bank Q2 preview: PAT growth seen at 16%, operating expenses to bite

In an early update on its Q2 performance, the bank said its loans increased by 23 percent for the quarter, led by a robust 22 percent growth in retail loans. At this level, the bank is back to its heyday of strong loan growth that averaged 24 percent pre-pandemic.

Both retail and corporate loans have increased at a fast pace. Higher retail lending essentially helps the bank to maintain margins as corporate loans tend to be priced aggressively. The bank’s small business loans to have shown double-digit growth consistently over several quarters.

Advantage deposits

Analysts said HDFC Bank will continue to surpass its peers in terms of increasing lending, given its strong liability franchise.

“HDFC Bank’s retail deposits have grown strongly at 6 percent QoQ, much higher than the flattish growth for the sector, clearly demonstrating the bank’s strong franchise. We believe strong liability franchises become more valuable when rates rise,” analysts at Edelweiss Securities wrote in a note.

The high share of low-cost current accounts and savings accounts (CASA) would support margins. Lending rate hikes may also result in a sequential improvement in margins.

However, analysts at Kotak pointed out that HDFC Bank’s loan book structure could keep margins lower than peers. The bank has a retail-heavy book and also a higher proportion of fixed-rate loans.

“Given the increase in lending rates, we calculate that NIM will expand by 7- 10 bp. Even if NIM expands, the increase will be lower than other banks,” the Edelweiss analysts said.

Asset quality

HDFC Bank will show pristine asset quality ratios, in keeping with the past trend. Its gross bad loan ratio may remain around the 1.0-1.5 percent mark.

Seasonal stress in farm loans may moderate, dragging slippages down sequentially, according to analysts at Emkay Global Financial Services. Analysts noted that growth in riskier unsecured retail loans as well as small business loans is high. But HDFC Bank’s high provision coverage ratio compared with peers also adds to investor comfort.

“The bank carries a cumulative credit-related contingency + floating buffer of 80 bp and total provisions (comprising specific, floating, contingency and general) of Rs 307 billion is equivalent to 2.2 percent of advances or 170 percent of GNPA (gross non-performing assets). We estimate credit cost to settle 0.9 percent-1 percent,” ICICI Securities said in a note. The management’s comments on its unsecured loan book would be keenly noted by investors.

HDFC Bank shares have declined 14.7 percent so far this year.

While healthy loan growth along with stable margins and low credit costs may boost HDFC Bank’s profit, high operating expenses could mean softer operating profit growth. The bank has been expanding operations through new branches as well as investing in digital capabilities. This is expected to keep expenses high, which could put pressure on operating profit growth.