Concerned about HDFC Bank’s falling retail loan growth, drop in PE income: Siddharth Purohit

Retail loan grew by just 7% whereas the wholesale loan grew 37% which is very unusual, says the SMC Global Securities analyst.

What are your key takeaways from HDFC Bank numbers? A buffer is still being kept for NPAs or any kind of fallout post the pandemic impact?
The headline numbers are really good but the result was a mixed bag. There were many positives and at the same time there were a couple of concerns also. On the positive side, loan growth was interesting at 21% and asset quality was largely held on. There is no visible stress as of now on the balance sheet. All the positives during this quarter led to 20% growth in the bottom line.

Also, after a long time we saw the banks really controlling their costs and that helped in controlling overall costs and the bottom line up, but there were some marginal concerns. Historically, HDFC Bank has been a strong growth driver for the entire banking industry but a large part of HDFC Bank’s growth has come from the retail side but this quarter has been very unusual where the retail growth was not expected to grow because the entire quarter has been largely under lockdown for the entire country. Retail loan grew by just 7% whereas the wholesale loan grew 37% which is very unusual. That shows the stress in the retail segment for the entire economy.

Normally, this bank for several years has relied a lot on retail. Wholesale loan comes with its own set of risks. Right now, the underwriting standard for them has been very good and the corporates that they are lending to also are very good but somewhere down the line, corporates have their own set of challenges over a longer period of time. So, that is a little bit of concern to me.

I also noticed a slowdown or may be a sharp drop in the PE income. For many years, PE income has been a very big part of their bottom line and this quarter there was a sharp drop in quarter on quarter basis. PE income has a naturally very high correlation with the retail loan origination and that was virtually absent. Fee income also was a point of concern. That is why I am saying that while the headline numbers look very promising and very good, there were a couple of points which I want to highlight which is not very normal for HDFC Bank. So, it is a mixed bag from my point of view.

What is your call on the stock then?
After falling sharply, the stock has again rebounded very sharply from the lows and now is at 2.8 times FY22 adjusted book. Further upside looks very limited. We will recommend hold at this level which is a change from earlier continuous stand of buy because given the current environment, we feel that the stock seems to have upsides. However, you cannot ignore this stock and it should continue to be part of your core portfolio on the long side and the long term portfolio. However, near term challenges will remain for the bank and probably that is why we have kept a Rs 1,050 price target on the stock.