HDFC Bank: Credit card biz, Covid-19 second wave pose near-term threat

Market participants were quick to offload shares of private lender HDFC Bank on Monday as near-term concerns on the bank’s growth prospects weighed on investors’ minds. Shares of the Mumbai-based bank skidded 4 per cent in the intra-day trade to hit a low of Rs 1,373 apiece on the BSE.

HDFC Bank’s bottom line for the March quarter missed Street estimates as the lender set aside higher than expected provisions. The lender’s provision and contingencies in Q4FY21 rose 24 per cent over the same period last year to Rs 4,693.7 crore, which includes contingent provisions of Rs 1,300 crore. In the preceding quarter, provisions and contingencies made by the lender were to the tune of Rs 3,414 crore.

Effectively, its net profit came in at Rs 8,186.5 crore, up 18 per cent year-on-year (YoY), which was below consensus estimate of Bloomberg analysts who had estimated a net profit of Rs 8,436 crore.

The net interest income (NII) grew 12.6 per cent YoY to Rs 17,120 crore, driven by growth in advances at 14 per cent and a net interest margin (NIM) of 4.2 per cent.

“Despite stable NIMs and higher fees leading to a beat on operating profit, the bank reported slightly lower PAT at Rs 8,186 crore, as against expectation of Rs 8,300 crore, mainly due to additional contingent provisions of Rs 800 crore amid raging second Covid-19 wave and Rs 500 crore for interest-on-interest waiver,” noted Anand Dama, research analyst at Emkay Global, along with Neelam Bhatia and Mayank Agarwal in a result review report.

However, the robust credit growth and stable asset quality in the March quarter aren’t assuring enough as analysts believe the second wave of the coronavirus may delay growth and asset quality normalization in the near-to-medium term.

Dama highlighted that the bank reported a slight improvement in its gross non performing asset (GNPA) ratio at 1.32 per cent compared with pro forma GNPA ratio of 1.38 per cent in Q3, while its NBFC subsidiary HDB Financial Services reported a reduction in GNPA to 3.9 per cent relative to pro forma GNPA of 5.9 per cent in Q3, mainly led by heavy write-offs. “However, after witnessing a meaningful improvement in Jun’20-Mar’21 period, the bank is seeing rising incidence of EMI bounces in the system due to localized lockdowns induced by the second Covid wave which needs to be tracked,” he said.

Prakhar Sharma, equity analyst at global brokerage firm Jefferies, said that the recent increase in cheque bounce rate in April will be a key aspect to watch as it will impact credit costs as well as appetite for growth in the near-term. Another global brokerage CLSA estimates this increase in credit costs at 15-20bps in FY22.

Additionally, analysts believe that the lender’s retail growth, which was at 6.7 per cent YoY as against industry growth of 9 per cent YoY, could remain lackluster in the near-term amid localized lockdowns due to the raging second Covid wave.

“A fresh Covid wave can potentially disrupt the recovery of businesses hurting some sections of the loan book. Growth challenges may remain in place as retail is a highly profitable business for the bank and any derailment in the economic recovery due to Covid resurgence would impact revenue growth,” said a report by Kotak Institutional Equities.

In Q4FY21, advances of the lender grew by 14 per cent to Rs 11.32 trillion with retail domestic advances up 6.7 per cent YoY and wholesale advances up 22 per cent YoY. Deposits of the book lender grew by 16 per cent to Rs 13.35 trillion and CASA deposits grew by 27 per cent.

“The hard work HDFC Bank had to do to even grow 14 per cent in FY21 could be visible from the fact that it had approximately 50 per cent incremental market share in corporate loans in FY21. Given that SBI/ICICI/Axis/KMB have balance sheet strength as well as cost of funds to match HDFC Bank, it will be difficult for HDFC Bank to accelerate loan growth unless sector level growth picks up,” said a report by Ambit Capital.

The third factor that, analysts believe, remains a key overhang on the stock is the restrictions placed by the Reserve Bank of India on the lender’s credit card business.

“Resolution of review of IT platforms and lifting of embargo on new credit card issuances needs to be watched. As per management, the recent tech-glitches are disparate events, but we believe they might elongate the review process,” said Sharma of Jefferies.

Ambit Capital believes that ban on issuing credit cards should impact top-line growth given the segment contributes nearly 15 per cent towards core operating profit. “Credit card business (5 per cent of loan book) which has NIMs of 21- 22 per cent should come down in FY22 as proportion of loan book due to RBI ban and may negatively impact NIMs,” it added.

That said, HDFC Bank offers a strong balance sheet and likely higher residual capital than most. This higher residual capital, Edelweiss Securities said, ensures that its best-in-class franchise can support an adequately large balance sheet after this crisis and fulfil its earnings potential in the long-run.