Healthy loan book and stable asset quality, among other things, hold it in good stead
With the resurgence of Covid cases and partial lockdowns in many parts of the country, the benchmark indices dipped about 6-8 per cent from their recent peaks in mid-February.
The stock of HDFC Bank has corrected by about 16 per cent from its peak in February 2021. The stock’s current valuation of about 3.7 times its consolidated book value, is also at a 9 per cent discount to its three-year average price to book ratio (4.1 times). Healthy growth in loan book with stable asset quality, steady margins and sound capital and liability profile of the bank hold it in good stead. Given its strong business fundamentals and its premium valuation when compared to private sector peers, investors can make use of market volatility to accumulate the stock.
The bank’s loan book grew at a compounded annual growth rate (CAGR) of 21 per cent over FY16-20, to ₹9.93 lakh crore, and deposits by a CAGR of 20 per cent to ₹11.5 lakh crore. With net interest margins remaining steady at 4.3 per cent and fairly stable asset quality (gross non-performing assets were less than 1.4 per cent of the bank’s loan portfolio), the bank also reported a 21 per cent CAGR growth in net profits to ₹26,657 crore over FY16 to FY20.
Even in the year gone by, despite being struck by the pandemic, the bank’s loan book was up 14 per cent y-o-y to ₹11.32 lakh crore (while India’s average bank credit hovered around 5-6 per cent only during most part of FY21). The bank’s deposits too inched up to ₹13.4 lakh crore, (up 16.3 per cent y-o0y) with CASA making up for a healthy 46.1 per cent of the overall deposits in FY21.
Despite the financial turmoil wrecked by the pandemic, the bank’s GNPA inched up only to 1.32 per cent (compared to 1.26 per cent in FY20), reflecting its strong credit quality. However, the bank has been cautious about the likely impact of the pandemic and has provided (overall provisions including floating and contingent provisions) for about 153 per cent of the gross non-performing loans.
This coupled with the healthy performance of its broking subsidiary, resulted in a 16.8 per cent (y-o-y) increase in its consolidated net profits for FY21 (₹31,833 crore).
With banks getting risk-averse during the pandemic, HDFC Bank too resorted to (wholesale) corporate loans—currently constitute about 53.4 per cent of the bank’s portfolio . While much of FY21’s loan growth came from the wholesale book (up 21 per cent y-o-y), about 62 per of the incremental loans were granted to corporates rated AA and above (based on external ratings), according to the management’s comments in the March quarter’s results con-call. This provides greater cushion on the asset quality front.
Besides the portfolio is also very granular, with industry level concentration limited to 5 per cent or less. Near about half the wholesale book comprises loans to MSME, which yield higher returns.
However, given the glut of liquidity in the wholesale credit market, the bank saw a 10 basis point dip in its net interest margin (NIM) in FY21. This is set to improve in the coming quarters, given the management’s target to scale up the MSME book (beyond its large corporate loans) in the next 1-1.5 years.
The remaining loan book comprises retail advances —personal loans (10 per cent of the overall loan book), credit cards (6 per cent), auto loans (7 per cent), home loans and business banking (6 per cent each) and Kisan gold cards (4 per cent). The bank also lends for CVs, two wheelers, gold loans and loans against securities, which together constitute another 6 per cent of the book. While all these segments are poised for growth in the coming quarters, the bank currently suffers a ban on issuance of credit cards . However, this is not a cause of concern, according to the management, given the bank’s sourcing profile. About three-fourths of the sourcing for credit cards comes from existing customers of the bank, who have pre-approved credit limits. The management is also confident of recouping any residual drop in credit card business, within months of the RBI lifting the said ban.