HDFC Bank to outperform Indian peers in earnings, growth

It will see further growth by tapping in on underserved retail, SME borrowers.

HDFC Bank has sufficient buffers to withstand downside risks arising from the tough operating conditions in India, based on the bank’s results for the first half of fiscal year 2021, S&P Global Ratings said in a report.

The bank is expected to significantly outperform other Indian lenders in terms of growth and earnings. HDFC Bank’s loan book grew 16% YoY in the first half of FY2021, driven by wholesale loans.

Further expansion will be supported with the bank tapping in on underserved retail and small and medium enterprise (SME) borrowers in semi-urban and rural areas, says S&P. Growth can also come should the bank chose to increase its share in working capital loans of high-rated corporates.

S&P further anticipates the bank's domestic market share to cross 10% in the coming quarters. As of 31 March, its loan and deposit market share were already at 9.7% and 8.2%, respectively.

HDFC Bank's asset quality should also remain superior to the industry over the next two years, despite a likely deterioration from the COVID-19 fallout, thanks to the bank’s strong risk management standards and maintain its highly diversified portfolio.

The bank also has ample capital buffers, reflected in its Tier-1 ratio of 17.7% as of 30 September. Capital ration is expected to fall between 8.5% to 9% over the next two years, compared to 9.4% as of 31 March.

However, HDFC Bank’s core earnings will likely decline to 1.6% to 1.8% of average assets in FY2021 as the pandemic weighs on net interest margins and loan loss provisions.

Its credit costs will rise to 1.5% to 2%% of gross loans over fiscals 2021 and 2022, compared with the five-year average of 0.8%; whilst gross nonperforming loans (NPLs) will likely comprised 2% to 3% of total loans, says S&P.

As of 30 September, reported NPLs declined to 1.1% QoQ on the back of regulatory forbearance.

Profitability is anticipated to normalize or return to the pre-pandeic level of 1.9% by FY 2022.

Photo courtesy of Wikimedia Commons

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