HDFC Bank asset quality slips but no 'immediate signs of stress'

HDFC Bank's headquarters in Mumbai, India.

Source: HDFC Bank.

HDFC Bank Ltd. reported a slight decline in asset quality in the April-to-June quarter, but this is not likely a signal of stress as India's strong economic growth continues to fuel lending.

India's biggest private sector lender reported a gross nonperforming assets (NPA) ratio of 1.17% in the fiscal first quarter, up 5 basis points from 1.12% three months prior. Still, the ratio of bad assets was lower than the 1.28% in the same period of 2022, the lender reported July 17. The slight increase in the NPA ratio came as HDFC Bank noted the impact uneven rainfall in key agricultural regions had on its rural borrowers.

The lender reported "a slight seasonal blip" in its NPA, mainly due to stresses in its commercial and rural loan book, Anand Dama, Senior Research Analyst at Emkay Global Financial Services, said in a July 18 note. "Retail asset-quality continues to hold up and the bank does not see any immediate signs of stress."

The Reserve Bank of India said bad loans in the country's banking industry fell to a 10-year low of 3.9% in March, while the net nonperforming asset ratio declined to 1.0%, bettering the central bank's June 2022 predictions. Simultaneously, the country's banks' strengthened capital will allow them to meet minimum capital requirements even under stressed scenarios, the central bank said in a June 28 report.

Fastest-growing major economy

The central bank expects India's economy to grow 6.5% in the fiscal year that started April 1, following a 7.0% expansion in the prior fiscal year. This makes India the fastest-growing major economy, as the International Monetary Fund predicts global growth to slow to 2.8% in 2023 from 3.4% in 2022.

Credit demand in the country has remained robust for several quarters, led by the retail sector. Credit growth outpaced deposit growth in the financial year ended March in a sign of strong domestic demand.

HDFC Bank's total advances rose 15.7% year over year to 16.3 trillion rupees in the quarter ended June, down from 17% in the previous quarter, due to moderation in corporate loans. Its corporate loans grew 11% year over year. The loan growth was aided by the commercial and rural banking sector, which grew 29%, Chief Financial Officer Srinivasan Vaidyanathan said during a post-earnings call with analysts.

"We continue to see healthy domestic demand conditions, resilience and services exports, and [a] push from government through [capital] expenditure," Vaidyanathan said.

Strong capital

HDFC Bank's net profit rose 29.1% year over year in the June quarter to 123.70 billion rupees, and revenue was up 25.9% to 350.67 billion rupees.

Net interest income, without counting the bank's subsidiaries, rose 21.1% year over year to 235.99 billion rupees. Its net interest margin was 4.3% based on interest-earning assets, HDFC Bank said.

The bank's capital adequacy ratio based on Basel III guidelines rose to 18.9% as of June 30, against 18.1% a year ago. The bank is required to keep the ratio at 11.7%, which includes a capital conservation buffer of 2.5% and an additional requirement of 0.2%, as the lender is identified as a Domestic Systemically Important Bank. The bank's common equity Tier 1 capital ratio was at 16.2% as of June 30.

As of July 17, US$1 was equivalent to 82.06 Indian rupees.