It?s another 30%…and ticks the boxes: HDFC Bank (HDBK) has reported another 30% profit growth quarter?in line with expectations. It also ticks the boxes?strong margins, decent loan growth, business mix remains the same and asset quality ratios look the same, and are fine. In many senses, it?s another good predictable quarter, leaving analysts little to think/write about?though this time, that might not necessarily be so.
But there?s a bit of sluggishness at the operating level: HDBK?s pre-provisioning (ex-trading gains) profit growth is 19% year-on-year; well under headline 30% profit growth. This reflects some challenges: weak fee income (+9%; weak FX and distribution fees), slightly moderating loan growth (21% y-o-y) and a slight rise in asset deterioration (corporate rather than retail). These don?t really reflect a problem or the beginnings of a material one (as the market?s initial response might suggest); but the slowing economy?s strains are a little more evident than has been the case so far.
Largely the same…maybe a little muted: There?s plenty of the usual good in the quarter (absolute and relative level)?margins are at a high (4.6%, unlikely to be impacted by recent market challenges), asset quality?s good (maintains 1% GNPL?gross non-performing loan–and 0.3% net NPL) and the deposit / loan mix continues to be stable. That said, the management is a little more cautious than before on macro: lower industry growth estimate (13/14%), sluggish asset quality environment (CV/CE?commercial vehicle/construction equipment–, some corporates, and protracted slow GDP could pose problems) and less sure of the rate direction (albeit largely indifferent to it). It?s the same business and approach to it; but probably a softer top-down outlook.
The step down from 30%? We believe HDBK is now structurally operating at a core operating profit growth level of about 25%; not its 30% headline level. It does have some earnings kickers?operating costs and distribution leverage?but 30% has to step down to 25%. That should not be a material valuation/expectation challenge (quality/growth premium stays, ROEs?return on equity?are rising), but it?s an adjustment that lies ahead.