HDFC Bank: still waiting for the economic recovery - Livemint

HDFC Bank will have to get back to its old ways of 30% profit growth to generate market-beating returns over the medium term. Photo: Pradeep Gaur/Mint

HDFC Bank Ltd's steady performance in recent times hasn't set its stock on fire. The bank's shares have marginally underperformed the BSE Bankex index since the beginning of the last fiscal year. Its March quarter net profit growth of 20.65% also didn't excite investors in a tepid market.

Although the bank has been delivering a steady net profit growth of at least 20% in the past eight quarters even when economic growth was sluggish, it is still a comedown from the pace of the four years prior to that. At that time, the bank delivered a 30% net profit growth quarter after quarter, helped by lower provisions and tight control over operating expenses.

Of course, the economic slowdown had a lot to do with that, but the lender also seems to have reached a high plateau on many performance yardsticks. Gross non-performing assets are less than 1% of its loan book and credit costs are low. The bank reported net interest margin (NIM) of 4.4% in the March quarter, just 20 basis points off a historic high. Return on assets are 2%, as high as they have been over the past decade and a half.

NIM is a measure of how much money banks make from their loans. One basis point is one-hundredth of a percentage point.

Although the bank continues to tighten its belt, shaving operating expenses will only go so far in increasing profits.

Expansion will increase the cost-to-income ratio, as can be seen from the March quarter when the bank opened 355 branches.

Thus, a faster pace of loan growth is the only factor that can return the bank to 30% plus net profit growth rates. To be sure, it has comfortably beaten the industry loan growth rate, as has been its practice. In the March quarter, its loan book grew a fifth from a year ago.

That doesn't seem to be enough for a bank that trades at the highest valuation among the world's largest banks, according to Bloomberg data. To generate market-beating returns over the medium term, HDFC Bank will have to get back to its old ways of 30% profit growth. The fact that it has among the best capital adequacy ratios among Indian private banks will stand it in good stead.

The writer does not have positions in the company mentioned above.

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