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Shares of HDFC Bank Ltd fell 1% on the National Stock Exchange on Monday, a day when the Nifty50 index was up, albeit marginally. The bank’s December quarter results (Q3FY22) announced on Saturday showed it earned a net profit of ₹10,342 crore. This is broadly in-line with the Street' estimates and represents an 18% year-on-year growth, which isn’t bad at all.
In Q3, the bank’s net interest income rose 13% year-on-year driven by a healthy loan growth of 16.5%. Net interest margin was unchanged sequentially at 4.1%, down 10 basis points (bps) year-on-year and below the historical average. One basis point is 0.01%.
"This has been an irritant in the past few quarters, mainly due to slow retail growth and an unfavorable portfolio mix," said analysts from Emkay Global Financial Services in a report on 16 January. The brokerage added, “Retail credit growth remains sub-optimal, with its share at 47%, down from 53-54% 2 years’ ago, weighing partly on margins."
Meanwhile, HDFC Bank’s non-interest income grew 10%. This was impacted by a weak fee income growth, which increased a mere 2% dragged by lower credit card fees.
Overall, HDFC Bank’s Q3 results, while not bad, aren’t particularly impressive. “We saw a decline in provisions for the first time since Q1FY15 as the bank showed asset quality strength. However, the operating profit performance is still quite weak and likely to be so in the near term," said Kotak Institutional Equities’ analysts in a report.
As such, shares of HDFC Bank have underperformed peers over the past one year. Some reasons for subdued stock performance include the Reserve Bank of India’s embargo on its card/digital initiatives and slower topline growth. In calendar year 2021, HDFC Bank’s shares rose a modest 3% at a time when rival ICICI Bank Ltd’s shares appreciated surged 39%, helping boost the latter’s valuations. As such, the underperforming trend of HDFC Bank vis-à-vis ICICI Bank has continued in 2022, so far.
Jefferies India expects HDFC Bank to narrow the gap on growth and sustain its higher return on equity, which will be key to compounding-led returns from the stock. “We see 18% CAGR in profit over FY21-24 and improvement in net interest income growth towards 16-17% would be key to rerating," said Jefferies’ analysts. CAGR is compounded annual growth rate.
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