HDFC Bank announced the results of its 1st Quarter (April – June) of 2020. A quarter most challenging for all businesses due to lockdown and economic uncertainties due to Covid-19.

The banking sector, being an essential sector, was operational during the lockdown. But challenges were plenty. Moratorium on loans meant lower inflows and higher risk of future bad loans (Non-Performing Assets). The entire industry was staring at its biggest crisis ever.

Amidst this, there was not many expectations from the first quarter results of any company. But when HDFC Bank came up with its numbers, it was something the market was not exactly expecting. The numbers were much better than expected. Here are some of the insights into key numbers of first quarter of HDFC Bank:

  • HDFC Bank is known as “20% company” – a reference to the consistent 20% growth in profits over the years. This quarter to the bank’s net profit grew by 19.6% to Rs. 6659 crores.
  • Advances (Loans) grew at the rate of 20.9% over last year.
  • Retail loans grew at 7.2% while corporate loans grew at 37.6%
  • Deposits grew by 24.6% over the same period last year
  • Net interest income (interest earned less interest paid) grew by 17.8% to Rs. 15665 crores.
  • The net interest margin (difference in average lending rates and average deposit rates) was 4.3%
  • Gross NPA was 1.36% (Q1 last year 1.40%) as compared to the industry gross GPA of 8.5% (as of March 2020)
  • Net NPA stood at 0.33% as against 0.43% in Q1 last year
  • 9% of loan book under moratorium – much lower than the industry

Our View:

HDFC Bank has always been extremely prudent and cautious about whom to lend. This is evident from extremely low NPAs and lowest moratorium numbers. The focus on quality has ensured that the bank today stands tall even in these uncertain times. HDFC bank has specifically gained due to two important factors.

  1. The uncertain times has also triggered movement of money from banks which are vulnerable and weak. Customers look for safety and the importance of safety is higher in the midst of uncertainty. This explains preference towards the likes of HDFC Bank for depositing money. Problems with Yes Bank has also triggered this flight of capital.
  2. Public Sector Banks have been in the mess of high NPAs in recent times. Low availability of capital due to moratorium has made matters worse for them as they do not have sufficient appetite for lending.

What lies ahead for HDFC Bank?

While there are no doubts about the business growth of HDFC Bank, there are a couple of issues that could hinder the pace of growth:

  • About a couple of weeks ago, it came to light that HDFC Bank was forcing its vehicle loan customers to install GPS. You can read about the incident here.
  • The bank has conducted an internal investigation and also sacked a few senior executives. 
  • Now, RBI has sought internal investigation report from HDFC Bank
  • This could get bigger and uglier impacting HDFC Bank’s image of being trustworthy and clean
  • The second important factor is finding a successor for its CEO Mr. Aditya Puri who has to compulsorily retire in October due to regulatory requirements. There are a lot of speculations on who will succeed him. A shareholder however has only one question in mind – will the successor be able to continue the legacy of Mr. Puri? Mr. Puri has had a large role to imbibe the business practices and culture which is the key to HDFC Bank’s success. Will the bank’s culture and business practice continue to be the same way? This is a big question as the shoes of Mr. Aditya Puri are too big to fill.

What should investors do with HDFC Bank?

HDFC Bank is one company which should definitely be a part of any equity portfolio. It is a must-have – there are no two ways there. The next few months are likely to give you enough opportunities to buy – largely due to the factors mentioned above. This is a stock that has to be bought at every dip. The last decade belonged to HDFC Bank; there is no reason why the next decade shouldn’t belong to it.

Read our other blogs here.

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