A customer exits a branch of HDFC Bank Ltd. in Mumbai (Photographer: Dhiraj Singh/Bloomberg)

Q1 Results: HDFC Bank Misses Profit Estimate On Mark-To-Market Loss

HDFC Bank Ltd. reported its slowest profit growth in five quarters as the value of its bond investments declined due to a rise in yields.

Net profit for the quarter ended June rose 18.2 percent to Rs 4,601 crore, India’s largest private lender by assets said in an exchange filing today. Analysts tracked by Bloomberg had forecast a profit of Rs 4,786 crore. Net interest income, or the core income from operations, rose 15.4 percent to Rs 10,813.6 crore.

A key reason for the lower than expected profit was a mark-to-market hit to the bank’s bond portfolio. HDFC Bank said it had decided to provide for the losses upfront, despite the RBI allowing banks to spread the provisions over four quarters. Most banks have seen the value of their bond portfolio erode as yields have surged since September 2017. In the June quarter, the benchmark 10-year bond yield hit 8 percent for the first time since 2015.

The bank recognised the entire mark-to-market loss of Rs 391.0 crore in the current quarter ended June 30, 2018. The loss was primarily attributable to the corporate bond portfolio.
HDFC Bank Statement

Operational Performance

The bank reported a 15.4 percent growth in net interest income backed by 22 percent growth in advances. For the quarter, net interest margin stood at 4.2 percent compared to 4.3 percent last year.

Advances growth was split evenly with retail loans growing 21.6 percent and wholesale loans rising by 22.7 percent. Total deposits grew 20 percent, with current account and savings account (CASA) deposits rising by 17.4 percent. The CASA ratio has moved back to the pre-demonetisation level of 41.7 percent from 43.5 percent last quarter.

The Mumbai-based lender saw asset quality remain largely stable with bad loans as a portion of the total assets rising marginally. The gross non performing assets (NPA) ratio were at 1.33 percent compared to 1.3 percent in the previous quarter. The net NPA ratio was stable at 0.41 percent. The bank has a high provision coverage ratio of 70 percent.

The absolute amount of bad loans rose 11 percent in April-June. Yet, that's not a big worry, according to Ashutosh Mishra, an analyst at Reliance Securities.

“Given the current stress, especially in the SME sector in India, things will be a little bit challenging. And HDFC Bank is a slightly larger player in that space,” Mishra told BloombergQuint. “Probably that's where the stressed NPAs are coming from. However, till you're generating a sufficient level of operating profit, these things are manageable.”

Mishra said the slight decline in margin was due to a shift in HDFC's lending portfolio. “HDFC Bank is focusing towards corporate lending. So when you go from retail lending to corporate, there is margin depression.”

Other Highlights

  • Fee income growth stood at 23 percent.
  • Core cost-to-income ratio dropped from 40.1 percent from 42.7 percent last year.
  • Capital adequacy ratio stood at 14.6 percent
  • The bank’s balancesheet size rose to Rs 1,080,409 crore

Shares of HDFC Bank closed 0.2 percent higher at the end of trade on Friday. The scrip had risen 11.8 percent during the April-June period.

HDFC Bank now seems to have gotten a lot of cost optimisation, said Avinash Gorakshakar, research head of Joindre Capital Services Ltd. The investments they've made in the digital space will help them get more operating leverage, he said, adding the next trigger for the stock will be capital raise, which will give the bank the next lever of growth.