MC Analysis: Top 5 takeaways from HDFC Bank’s Q3 earnings

While HDFC Bank met expectations on headline numbers, the results disappointed investors who looked under the hood

HDFC Bank, on January 16, reported a net profit of Rs 16,372 crore for the October-December quarter of 2023-24, a 33.5 percent jump over the Rs 12,259 crore clocked a year ago. However, the country’s largest private sector bank reported slightly increased pressure on its non-performing assets (NPA), where gross NPA stood at 1.26 percent, from 1.23 percent a year ago.

The bank also made some announcements regarding  its provisions, alternative investment funds (AIF), digital initiatives, and impact of the increase in the risk weight of assets.

Here is an analysis of the five key elements of the earnings report:

Net profit

The 33.5 percent year-on-year (YoY) jump in net profit was slightly lower than the market estimate, which expected a net profit of Rs 16,427 crore - a 34 percent jump. While meeting expectations on headline numbers, the results disappointed investors who looked under the hood.

The disappointment was reflected in the shares of the bank, which fell over five percent on January 17 following a seven percent slump in the bank’s  ADRs (American Depositary Receipts) overnight, post the results.

Asset quality

On NPAs, the lender reported stable quarterly numbers, albeit with a slightly higher GNPA. On the other hand, the net NPA for the quarter stood at 0.31 percent compared to 0.33 percent last year.

In absolute numbers, the bank’s GNPA stood at Rs 31,110 crore, versus Rs 18,763 crore last year, and the NNPA stood at Rs 7,664 crore, versus Rs 5,024 crore in the year prior.

Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank, highlighted that the bank had seen an improvement in its asset quality. "Our asset quality has improved and the current credit conditions seem quite good,’’ Srinivasan said in the press conference after announcing the results.

AIF provisions

The Reserve Bank of India (RBI), on December 19, 2023, said that regulated entities, such as banks, non-bank lenders, and home financiers, cannot invest in AIFs that have directly or indirectly invested in companies that have borrowed money from the lenders.

The central bank said such lenders need to liquidate their investments in the AIF scheme within 30 days if the AIF  makes a downstream investment in any such debtor company.

Further, if lenders are already invested in schemes with such downstream investments, the 30-day period shall be counted from the date of issuance of the circular, the RBI added. If lenders fail to liquidate their investments in that time, they need t make a 100 percent provision on such investments, the RBI noted.

Here, Vaidyanathan said that the bank has made a 100 percent provision for its AIFs. "Our AIF book is Rs 1,220 crore, and RBI asks us to make a provision for that by January 18. We have done so. We have made a contingent provision of 100 percent of our AIF book," he explained.

Digital investments

For the past few years, many big banks, including HDFC Bank, have been facing issues regarding their technology and digital banking services. Moneycontrol has in the past highlighted these issues.

Regarding new digital initiatives, Vaidyanathan said the bank is working on its net and mobile banking, and expects to bring the revamped platforms to the market in the next two quarters.

“We are developing that internally, instead of getting a third-party and adapting our systems,” Vaidyanathan said.

RWA impact

On November 16, the RBI increased the risk weight on unsecured consumer loans from banks and NBFCs by 25 percent. Earlier, a risk weight of 125 percent was applicable for banks, and 100 percent for NBFCs. The same now stands at 150 percent for banks and 125 percent for NBFCs.

The increase in risk weight for commercial banks (on outstanding as well as new loans) includes personal loans. However, other categories such as housing, education, and vehicle loans, and loans secured against gold and gold jewellery, have been excluded as the risk perception is less on these loans.

Here, Srinivasan said that the bank had a 97 basis points (bps) impact on the capital adequacy ratio (CAR) due to the increase in the risk weight on unsecured loans.