Q1 asset quality tad weak, yet HDFC Bank best bet: Experts

Despite HDFC Bank reporting first quarter earnings in line with market expectations, a slight rise in gross and non-performing assets resulted in severe pounding of the stock. Terming the treatment of stocks as temporary, most experts continue to call it a safe bet among private sector banks.

India's second largest private sector HDFC Bank reported 30 percent year-on-year rise in April-June net profit at Rs 1,844 crore, aided by a spike in the other income and robust loan growth. However, stock corrected 3 percent immediately after the earning announcement. It revealed a marginal rise of 10 basis points in the bank's net non-performing asset ratio, which stood at 0.30 percent as against a static level 0.20 percent recorded for last so many quarters.
"NII and profit were bang in line…but I think asset quality disappointed," Rajiv Mehta of IIFL told CNBC-TV18.
The bank's net interest income (NII) or the difference between interests earned and paid out, increased 21 percent Y-o-Y to around Rs 4,420 crore. Experts agreed that disappointment on asset quality could be one quarter aberration, and the stock would continue to be the best bet among banking stocks.
"It is one of the safer havens amongst the banking stocks, so we continue to retain buy rating. At Rs 650, it is a buy," Mehta stressed.  
Vaibhav Agrawal of Angel Broking also agreed that HDFC Bank is a defensive bet.
"From a fair value point of view we do see about 12-13 percent upside, but it could very well overshoot that fair value as well in the near-term; with the kind of outlook for the rest of the sector," Agrawal said. He remains cautious on the banking sector especially after liquidity tightening measures of Reserve Bank in last two days. 
Going forward, Mehta expects HDFC Bank's margins to come under pressure slightly due to higher cost of funds. "Cyclically, in the near-term higher cost of funds could impact margins by 10-20 bps, but it should not be a negative surprise as such," Mehta added.  The bank has been able to manage margins across interest rate cycles pretty well historically. Net interest margin in the first quarter remained steadfast at 4.6 percent.