HDFC Bank Ltd’s earnings for the fourth quarter (Q4FY22) announced on Saturday were unexpected. Weak net interest margin (NIM) and lower-than-expected net interest income (NII) growth were particularly disappointing. NII is the interest spent minus the interest earned.
In Q4, core NIM fell 10 basis points sequentially to a multi-quarter low of 4%. “While the management stated that it has deliberately chosen lower NIMs to keep OPEX and credit costs under control, 2.3% NII growth is disappointing quarter-on-quarter,” a report by Yes Securities on April 16 said. This is especially so at a time when loan growth stood at 8.5% versus Q3.
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In the post earnings call, the bank’s management said that NIM was impacted by the change in loan mix, where the lender focused more on wholesale than retail lending. The bank’s retail loan growth momentum was impacted by the auto finance segment, as the auto sector grapples with supply chain issues. In addition, lending in the credit card business outperformed sequentially, but it is still below the long-term trend, management said.
According to analysts at Prabhudas Lilladher, HDFC Bank’s NII traction remained soft in comparison to credit growth due to non-retail focus. The broking firm said in a report on April 17 that the credit mix of HDFC Bank from non-retail to retail stands at 61:39 compared to 50:50 pre-pandemic. This has affected the margins of the bank.
Overall, HDFC Bank’s Standalone Net Profit 10,055 crore missed analysts’ expectations. Still, there are some bright spots. Provisions were less and asset quality was better. Despite this, analysts expect a negative reaction on Monday.
In the past one year, HDFC Bank shares have gained 4.6%, lower than the sector index Bank Nifty, which has gained almost 18%. Part of the poor performance can be attributed to the bank’s digital crisis during this period and the Reserve Bank of India’s (RBI) ban on issuing new credit cards. In March, the RBI lifted restrictions on activities under its Digital 2.0 programme.
HDFC Bank was in focus after it announced its merger with Housing Development Finance Corporation Ltd. As such, the stock’s outlook will depend on the pace of recovery at NIM and the smooth transition of the merger. “Any negative surprises here, especially integration cost or delay in regulatory approvals, would impact investor sentiment towards the stock,” said an analyst on the condition of anonymity.