HDFC Bank Ltd’s earnings for the fourth quarter (Q4FY22), announced on Saturday, were unexciting. Weak net interest margin (NIM) and lower-than-expected net interest income (NII) growth were particularly disappointing. NII is the interest earned minus interest expended.
In Q4, core NIM fell by 10 basis points sequentially to a multi-quarter low of 4%. “While management stated that it has deliberately chosen lower NIM to keep opex and credit cost under control, 2.3% NII growth quarter-on-quarter is disappointing,” said a report by Yes Securities on 16 April. This is especially so at a time loan growth stood at 8.5% versus Q3.
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In a post earnings call, the bank’s management said NIM was impacted by a change in the loan mix, where the lender focused more on wholesale than retail lending. The bank’s retail loan growth momentum was impacted by the vehicle finance segment, as the auto sector is struggling with supply chain issues. Besides, while lending in its credit card business is better sequentially, it is still below the long-term trend, the management said.
HDFC Bank’s NII traction remained softer than loan growth because of its non-retail focus, according to Prabhudas Lilladher analysts. HDFC Bank’s loan mix in terms of non-retail to retail is 61:39 compared to 50:50 pre-pandemic, said the broking firm in a report on 17 April. This has weighed on the bank’s margins.
Overall, HDFC Bank’s standalone net profit of ₹10,055 crore missed analysts’ expectations. Even so, there are some bright spots. Provisions were lower and asset quality was better. Despite this, analysts expect a negative reaction on Monday.
In the past one year, HDFC Bank shares have risen by 4.6%, underperforming the sector index Bank Nifty, which has gained nearly 18%. Part of the underperformance can be attributed to the digital woes of the bank during the period and the Reserve Bank of India’s (RBI’s) restriction on issuing new credit cards. In March, RBI lifted restrictions on activities under its Digital 2.0 programme.
HDFC Bank was in focus after it announced the merger with Housing Development Finance Corp. Ltd. As such, the stock’s outlook will depend on the pace of recovery in NIMs and smooth transition of the merger. “Any negative surprises here, especially with respect to integration costs or delay in regulatory approvals would weigh on investors’ sentiment towards the stock,” said an analyst requesting anonymity.
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