With the bank maxing its performance in return ratios, its valuation of 3.82 times its year-ahead book value will be justified by how fast it can grow its balance sheet. Photo: Pradeep Gaur/Mint
A 20% profit growth is the new normal for HDFC Bank in this sluggish economic environment. It didn’t disappoint in the September quarter, with a 20.5% growth, although it was a tad below Street estimates. The notable feature in this set of numbers was loan growth.
HDFC Bank grew its loan book by 27.9%, a 19-quarter high. This at a time when the banking industry is struggling with credit growth and borrowing firms are preferring to use instruments such as commercial papers to raise funds.
The increase was due to a spurt in growth in both the retail and wholesale books. The retail segment, which gives HDFC Bank its edge over peers of comparable size, grew 29.3% year-on-year in the September quarter, nearly 5 percentage points more than in the June quarter.
The surprise was in the wholesale category, where the pace of growth accelerated to 25.1% year-on-year in the September quarter compared with 18.5% in the three months ended June. It is all the more impressive given the 30.1% rise in the September 2014 quarter.
To be sure, this category is more sensitive to interest rates. HDFC Bank cut its base rate by 35 basis points on 1 September and that would have helped to a certain extent. A basis point is one-hundredth of a percentage point.
The base rate cut along with a 37% rise in fixed deposits injured the lender’s net interest margins (NIMs) to some extent. It reported a NIM of 4.2%, down 10 basis points from the June quarter and 30 basis points below the year-ago number.
Secondly, growth in the wholesale book at a time of high corporate leverage is a double-edged sword. But HDFC Bank’s asset quality yardsticks continue to be impeccable and the gross non-performing asset ratio continues to hover a few basis points either side of 1%.
With the bank maxing its performance in return ratios, its valuation of 3.82 times its year-ahead book value will be justified by how fast it can grow its balance sheet. The September quarter numbers give a thumbs up to investors who have kept the faith.