HDFC Bank: Steady quarter but emerging concerns over retail portfolio

HDFC Bank’s Q3 performance has been stable and infuses confidence in the bank’s long term growth prospects. However, it is the retail portfolio that is showing a few signs of discomfort that the management must address.

HDFC Bank has delivered a stellar performance during unpredictable times. The bank continues to remain ahead of its peers due to the lesser affected asset quality. Lower demand for restructuring and higher provision coverage are the major comforting factors. However, building stress in the retail segment is the major factor to watch out for in the coming quarters.

HDFC Bank's Q3 performance has thrown a few important trends that are panning out in the banking industry.

Private vs PSU banks :

HDFC Bank's result is a further reflection on the growing divergence between the private and PSU banks. In the coming months, rest of the large private banks (ICICI Bank and Axis Bank) are expected to deliver the results on similar lines. However, public banks will continue to see stress building up.

Corporate vs retail :

The corporate portfolio has emerged far stronger during the current cycle while the retail segment is seen under pressure. The retail segment was the major growth driver in the past. Hence, the stress in the retail portfolio has come as a major trend reversal.

HDFC Bank's loan growth of ~16% YoY was led by an increase in corporate loans. The segment recorded a 25.5% YoY growth. Retail loan growth was subdued at 5% YoY. It could be an early sign that the corporate segment could lead in the next lending cycle.

Apart from that, loan restructuring is also a crucial aspect. For HDFC Bank, overall restructuring for COVID-19 stood at ~0.5% of advances. It was again largely skewed towards retail assets. There has been a steady increase in gross NPLs in the retail loan portfolio. In recent months, the commercial vehicle space has been under pressure as well.

The level of stress in the MSME segment declined to ~2.3% of the portfolio from an earlier estimate of ~3%. As per the internal stress testing, the wholesale portfolio continues to be rated around the historical level of ~4.4. The incremental disbursements during the quarter were also at the same risk level.

Dilemma over the asset quality :

Currently, reported GNPA/NNPA numbers are not the true reflectors of the actual stress. HDFC Bank has reported improved GNPA/NNPA ratios to ~0.8%/~0.1%.

However, If not for the supreme court order, the GNPA/NNPA ratios would have been at 1.38%/0.4%. The Pro-forma NPA numbers are way higher than actually reported numbers. The NPA ratios are bound to shoot up once the supreme court lifts the restrictions on asset classification. This will be a huge factor to assess the level of stress in the coming quarters.

Covered the basis well:

Amid the concerns over the retail portfolio, collection efficiency (CE) is improving. The bank reported CE at ~97% in December 2020 vs 95% in September 2020. It is currently near the pre-covid levels of ~98% seen in December last year. Management also indicated that cheque bounce trends are also getting closer to pre-Covid levels.

HDFC Bank made the extra contingent provisions of Rs 2,400 crore (12% YoY growth) toward slippages. Overall provisions now stood at Rs 3,400 crore for the bank. Its provision coverage ratio (PCR) improved to ~88% in 3QFY21.

The bank is comfortably placed with total provisions amounting to 148% of Pro-forma gross NPAs. It means that the Bank has efficiently covered all the potential NPAs arising out of the covid situation. And, it is comfortably placed to mitigate any negative surprises.

The PCR is a very strong indicator of a bank's health in a highly uncertain scenario going ahead. The stability of other banks will also be judged based on their ability to make aggressive provisioning.

Closing comments:

HDFC Bank's result is crucial. It has set the benchmark against which all the other banks will be judged.

While the corporate segment witnessed the maximum stress in the last cycle, it was the retail business that had helped HDFC Bank to emerge as a winner. In this context, growing retail stress could be worrisome for the bank. And, this is one area where the management will need to deploy most of its attention going ahead.

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