HDFC Bank likely to remain ahead of peers in second quarter — all eyes on loan restructuring, moratorium, and asset quality

• HDFC Bank is likely to remain ahead of peers in second-quarter earnings.
• India’s largest private sector bank may see slower growth in loans, but deposits are likely to increase with competition from smaller banks falling out.
• Commentary around moratorium, restructuring and non-performing assets (NPAs) will be critical.

HDFC Bank’s second-quarter results won’t be immune to the issues of the moratorium, restructuring of loans and non-performing assets (NPAs) that continue to hang overhead. However, strong deposit growth, better operation performance and sufficient money in the bank to deal with defaults is likely to place India’s largest private sector bank ahead of its peers.

“Asset quality will likely remain benign and ahead of peers,” said Edelweiss Research in its report.

The growth in loans may be slower than previous quarters, but HDFC Bank is still likely to track above the industry. However, the slowdown may end up impacting margins on a quarter-on-quarter (QoQ) basis.


On the flip side, with the competition from smaller banks falling out, deposits are likely to increase with the bigger private players attracting larger flow of savings.

HDFC Bank Q2 Earnings estimates:

Loan restructuring difficult to determine, but everyone wants to know
The Reserve Bank of India’s (RBI) Kamath Committee for the one-time restructuring of loans issued guidelines based on three pillars — five key ratios, sector-specific thresholds and pre-COVID performance of account.

According to the committee, 72% of all banking debt has been impacted by the coronavirus pandemic. At the end of June, HDFC Bank’s moratorium book stood at 9% of its total portfolio.

“Reported numbers to be less relevant with the moratorium up to August masking the actual stress,” said Japanese brokerage Nomura.

Regardless, India’s largest private bank has built strong provision buffers to offset any defaults. HDFC Bank’s asset quality is likely to stay intact, backed by its healthy provision coverage ratio.

The provision coverage ratio represents the number of bad assets — or NPAs — that the bank has to provide for from their own funds.

“Our analysis of loss absorption capacity estimates, moratorium data and historical track record of operating earnings delivery and capital raise is that large cap banks remain best placed in the current environment,” said Nirmal Bang.

Further management commentary around retail demand and restructuring pool for the bank over the last three months will be key.

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