HDFC Bank Q1 preview: Moratorium to contain slippages; recovery trends eyed

Private lender HDFC Bank is set to report its April-June, 2020 quarter (Q1FY21) earnings on Saturday, July 18 amid allegations of inappropriate lending activity in the vehicle financing unit. The allegations, analysts say, are expected to be raised during the management interaction.

“The allegations are grave for a bank that is one of the largest private players. Shareholders would expect clarity on the misconduct by the veteran, and would want to know the course of action being taken by the management,” says an analyst with a domestic brokerage who didn’t wish to be named.

Early this week, Bloomberg reported that the bank was investigating business malpractices in the unit which was headed by Ashok Khanna, an 18-year old veteran at the bank, who retired in March, 2020.

ALSO READ: HDFC Bank probes lending practices at vehicle-financing operation

That said, for the quarter under review, the bank is expected to report around 20 per cent year-on-year (YoY) growth in net profit. Besides, asset quality is seen stable owing to the moratorium being provided by the Reserve Bank of India (RBI).

Given this, analysts would watch out for the management’s commentary on retail asset quality, moratorium trends, and trends in collection efficiency.

“Asset quality trend will likely remain benign due to the moratorium, but ahead of peers. Key monitorable will be trend in book under moratorium,” said analysts at Edelweiss Securities in their result preview report.

Loan book and profit

Analysts believe that the lender is best placed among peers to tackle the Covid-19 crisis. “Corporate loan growth remains strong and is compensating well for the softness in its retail portfolio… A strong liability franchise would support margins while higher liquidity levels would enable the bank to ride the current crisis and gain further market share,” said analysts at Motilal Oswal Financial Services (MOFSL) in a results preview note.

The bank’s advances expanded by 21 per cent year on year to approximately Rs 1,004,500 crore, as of June 30, of which Rs 10,800 crore was disbursed between April-June, 2020. The outstanding loans stood at Rs 829,700 crore as of June 30, 2019, and Rs 993,700 crore as of March 31, 2020.

As regards deposits, they rose by 25 per cent to approximately Rs 1,189,500 crore as of June 30, as against Rs 954,600 crore at the end of June, 2019. The deposits were at Rs 1,147,500 crore at the end of Q4FY20.

On the profitability front, analysts at ICICI Securities peg the net profit at Rs 7,006 crore for the quarter under review, up 25 per cent YoY from Rs 5,568.2 crore reported in Q1FY20. Sequentially, it would be a mere 1 per cent growth compared to Rs 6,927.7 crore reported in Q4FY20.

ALSO READ: Private banks stare at washed-out Q1; moratorium, Covid-19 provisions eyed

However, a mildly cautious estimate by Kotak Institutional Equities project the net profit at Rs 6,595.2 crore, up 18 per cent YoY but down 5 per cent quarter-on-quarter (QoQ).

An outlying estimate given by IDBI Capital pegs the bank’s profit at Rs 7,810.9 crore, a jump of staggering 40 per cent YoY, and 13 per cent QoQ.

Interest income and margins

MOFSL sees the bank’s net interest income (NII) at Rs 15,390 crore, up 16 per cent YoY, from Rs 13,290 crore clocked in the June quarter of FY20. Those at ICICI Securities see the income rising 18 per cent on a yearly basis to Rs 15,769 crore.

“Fee income profile is likely to get impacted due to decline in economic activity on account of Covid-19. However, strong cost controls should drive an improvement in the bank’s return ratios. Besides, margins have improved sequentially due to the decline in cost of funds aided by strong/granular liability franchise. Thus, we expect margins to remain largely stable at 4.3 per cent,” said analysts at MOFSL.

ALSO READ: HDFC Bank lends Rs 10,800 crore in June quarter; advances grow 21%

Asset quality

According to analysts at ICICI Securities, HDFC Bank’s asset quality may be impacted with gross non-performing assets (GNPA) ratio rising 10 bps QoQ to 1.36 per cent and provisions staying elevated at Rs 4,018 crore.

Net NPA ratio, meanwhile, is again seen unchanged at 0.4 per cent.

Kotak Institutional Equities see the slippages declining 29 per cent YoY to Rs 3,000 crore in the June quarter, from Rs 4,225 crore seen in Q1FY20. On a QoQ basis, it would be a 5 per cent dip from Rs 3,150 crore seen in March quarter of FY20.

During the April-June quarter, which was marred by Covid-19 lockdown and partial easing towards the end, the stock price of the Mumbai-based bank outran the benchmark Nifty50 index. The counter surged nearly 24 per cent during the quarter under review, as against a 20 per cent rise in the Nifty index, ACE Equity data shows. Besides, it outperformed the Nifty Bank index as well which surged 11.6 per cent during the period.