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With sufficient financial headroom HDFC Bank to outperform others – ET BFSI


S&P Global Ratings, world’s leading provider of independent credit ratings, said today that HDFC Bank (BBB-/Stable/A-3) has sufficient financial headroom to withstand downside risks from tough operating conditions in India. They added that for the first half of fiscal 2021 (ending March 31, 2021), the bank’s results were resilient even in the times of a global crisis.

HDFC Bank grows amidst pandemic
HDFC Bank’s growth and earnings are expected to significantly outperform that of other banks. The bank’s loan book grew a robust 16% YoY in the first half of fiscal 2021 driven by wholesale loans. HDFC Bank is also likely to grow faster than the industry due to various factors like tapping underserved retail and small and midsize enterprise borrowers in semi-urban and rural areas, along with increasing its share in working capital loans of high-rated corporates.

The bank’s domestic market share is also expected to continue to increase, crossing 10% in the coming quarters. Its loan and deposit market share was 9.7% and 8.2%, respectively, as of March 31, 2020. Over the next two years, HDFC Bank’s asset quality is expected to remain superior to the industry, despite a likely deterioration from the COVID-19 fallout.

HDFC Bank profitability to normalize soon
Praising the bank’s highly diversified portfolio and strong risk management standards, S&P Global Ratings has forecast that HDFC Bank’s credit costs will rise to 1.5%-2.0% of gross loans over fiscals 2021 and 2022, compared with the five-year average of 0.8%. It also said that the gross nonperforming loans (NPLs) will likely be 2.0%-3.0% of total loans.

As of September 30, 2021, reported NPLs declined to 1.1% due to regulatory forbearance, compared with the previous quarter. In the absence of forbearance, the bank’s NPL ratio would have been at a similar level of 1.4%. However, HDFC Bank’s loan loss provisions remained high as the bank made contingency provisions for future NPLs.

“In our opinion, HDFC Bank has ample capital buffers, as reflected in its Tier-1 ratio of 17.7% as of Sept. 30, 2020. As per our forecast, the bank’s S&P Global Ratings risk-adjusted capital ratio will be 8.5%-9.0% over next two years, compared with 9.4% as of March 31, 2020. The bank’s core earnings could marginally decline to 1.6%-1.8% of average assets in fiscal 2021 as the pandemic weighs on net interest margins and loan loss provisions. We expect profitability to normalize to a pre-pandemic level of 1.9% in fiscal 2022 as the Indian economy rebounds,” S&P Global Ratings Report read.

The stock closed 1.75% higher at Rs 1224.60.





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