HDFC Bank Q3 takeaways: Assets quality in good shape, loan recast demand low

MUMBAI: HDFC Bank surprised analysts and investors by registering a blistering double-digit year-on-year growth in net profit and showing improvement in asset quality for the quarter ended December.

The lender posted a net profit growth of 18 per cent, which is closer to its usual pre-Covid-19 growth rate of 20 per cent, as against analysts’ estimate of single-digit growth.

The company’s net interest income saw blistering growth of 15.1 per cent on year helped by near 16 per cent jump in advances in the quarter, reflecting an improvement in credit growth.


Analysts suggested that the strong earnings performance is likely to result in a strong showing by the stock on Monday. HDFC Bank currently trades at 18 times one-year forward earnings, a discount to its benchmark Nifty 50 index, suggesting that there remains room for more gains, said analysts.

Here are the key takeaways from the private sector lender’s earnings:

Asset quality in good stead
HDFC Bank showed improvement in asset quality as both the gross and net non-performing ratios showed sequential decline in the December quarter. More importantly, the lender said that without accounting for the Supreme Court’s standstill on recognition of bad loans till August 31, the gross NPA ratio as at 1.38 per cent largely unchanged from the previous quarter, reflecting no new stress.

Restructuring demand low
HDFC Bank said that demand for restructuring of loans by borrowers under the Reserve Bank of India’s special Covid-19 recast window was at 0.5 per cent of advances, suggesting that the bank has seen muted demand for recast from borrowers. The lender said that it holds contingent provisions of Rs. 8,656 crore against any future Covid-19 related liabilities, and a floating provision of Rs. 1,451 crore.

Strong operating performance
Given the current uncertainty around Covid-19 standstill and lender’s asset quality, analysts believe pre-provision operating profit serves as a better metric to gauge a bank’s performance. HDFC Bank’s pre-provision operating profit stood at Rs. 15,186 crore, up 17.3 per cent and higher than analysts’ expectations.

Other business help growth
HDFC Bank’s non-interest bearing business did well with 11 per cent on year growth to Rs. 7,443.2 crore, and now made up for nearly a third of the lender’s topline. In the previous quarter, it accounted for little over 27 per cent of total income. The lender’s treasury desk accounted a robust 16 per cent on year growth in revenues.

HDB Financial Services posts loss
In the December quarter, HDB Financial reported net loss of Rs 44.3 crore as against a net profit of Rs. 216.7 crore a year ago. However, at an operating level the subsidiary posted a 7.5 per cent on year growth to Rs. 748.7 crore. The arm’s asset quality improved as gross NPA ratio was at 2.7 per cent in the reported quarter as against 4.3 per cent in the previous quarter.