HDFC Bank Q2 earnings growth: 50? 10? 6%? Here is the correct version

Hot Stocks
admin
October 17, 2023
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13 minutes read

Contrary to the 50 percent profit growth number doing the rounds, HDFC Bank’s consolidated PAT growth is only 10 percent, pointed out analysts as the base quarter numbers do not include HDFC Ltd’s numbers

HDFC Bank reported a sharp contraction in NIM at 3.4 percent compared to 4.1 percent YoY.

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HDFC Bank’s first quarterly results post-merger have left analysts and investors scratching their heads. Contrary to the 50 percent profit growth number doing the rounds, HDFC Bank’s consolidated PAT growth is far lower, pointed out some analysts.

On October 16, HDFC Bank which has now merged with its parent HDFC Ltd, reported a quarterly consolidated net profit of Rs 16,811 crore, up 51 percent YoY from Rs 11,125 crore in the same period last year. The problem here is the base number or the number for the year-ago quarter does not include the profit reported by HDFC Ltd for that quarter.

The earnings growth of 50 percent thus is grossly exaggerated as it compares the merged entity’s profits with that of the bank only for the prior period.

Also Read: HDFC Bank Q2 marred by merger, margin recovery on cards: Should you buy or sell the stock?

Breaking down HDFC Ltd’s profit in the base quarter

This was called out by CapitalMind’s Deepak Shenoy in his X thread. He corrected the base figure to conclude that the bank reported a 10.2 percent growth in profit. Here is the math.

In Q2 FY23, HDFC Ltd reported a consolidated net profit of Rs 7,042 crore, including the profit share of subsidiaries and associates. Shenoy deducted the HDFC Bank’s share of profits (as it was an associate company where HDFC had a 24 percent stake prior to the merger) from the consolidated number and added the resultant profit number to the prior period profits of HDFC Bank.

HDFC Bank’s share in HDFC Ltd’s profit for Q2 FY23 stood at Rs 2,954 crore; deducting this, its bottomline stood at Rs 4,088 crore. Now, adding this number to HDFC Bank’s consolidated profit (Rs 11,125 crore) for the same period, throws up Rs 15,213 crore as the prior period profit for the merged entity. Taking this as the base, the net profit growth for Q2 FY24 works out to 10.2 percent.

“HDFC Bank used to easily deliver 15 percent or more (heck, we used to call it the excel sheet results) But hey, it’s just merged, so stuff will be tough a little,” Shenoy said in his X thread.

Also Read: HDFC Bank sees 5-10 bps I-CRR impact on net interest margins, says CFO Vaidyanathan

What if we compare standalone numbers?
That does not seal the growth picture though. There is a chink in this calculation: the base number according to Shenoy takes into consideration the consolidated numbers for HDFC Ltd, including the profits of its subsidiaries.

To get a sense of the lending operations of the business, which is the mainstay for the bank, analysts usually look at standalone numbers. Thus, brokerage firm Jeffries in its report highlighted an even lower growth rate – 6 percent. Here is their math.

In Q2 FY23, HDFC had reported a standalone net profit of Rs 4,454 crore. Now, adding this to HDFC Bank’s standalone profit (Rs 10,605 crore) gives Rs 15,054 crore. Taking this as the base, the net profit growth for Q1 FY24 is only 6 percent, at Rs 15,976 crore as reported by the merged entity.

Indeed, this is how the lending business of HDFC-HDFC combined has fared in the past one year. That would qualify as unimpressive performance according to analysts. But the story isn’t over yet.

Also Read: The retail craze | Nifty 500 stocks where public shareholder base boomed since Covid days

Standalone or consolidated growth matters?
One question to ask from an investor perspective, which growth numbers are more relevant to look at: standalone or consolidated? Usually, analysts look at standalone numbers to get a sense of how the main-line of business is doing. Otherwise, from an investor perspective, consolidated number should be the defacto standard as that is what gives a complete picture of the company’s overall performance, which is what is relevant to get a view on the stocks’ fair price.

After all, any improvement or deterioration in the subsidiaries does impact the company’s overall net worth. Here, HDFC Life Insurance, HDFC Ergo and HDFC AMC were earlier subsidiaries of HDFC Ltd. Now, they are subsidiaries of HDFC Bank which makes the comparison more complex.

While the 6 percent growth does look anaemic, some analysts feel that the comparison is not appropriate because of the difference in accounting standards. “It’s hard to hazard a guess on what could be the difference in earnings caused by the change in accounting standard,” said an analyst who did not wish to be quoted.

Why such poor growth?
The poor growth seems to be a result of moderation in lending and damage caused by a change in accounting standard.

Notably, HDFC Bank reported a sharp contraction in NIM (net interest margin) at 3.4 percent compared to 4.1 percent YoY. The management in the post-earnings call explained that some adjustments to the NIM were due to the fact that HDFC’s accounting before the merger was as per IndAS. The numbers are now restated according to Indian GAAP, in line with HDFC Bank’s accounting.

Could this make such a large dent in profits? Analysts won’t hazard a guess, but Nikunj Pugalia, deputy group chief financial officer at Neo Group said that IndAS accounting is more intent-based, while IGAAP is an old methodology.

Also Read: Here are top PMS funds in September, most of them are fairly new

“From FY17, all companies were asked to move to IndAS, based on networth, but this was not applicable for banks,” he said. “For instance, in IndAS, when a loan is disbursed, all upfront costs, fees incurred to disburse that loan is amortised over the lifetime of the loan. In GAAP, it is accounted for upfront,” Pugalia added.

In case of provisioning for bad loans too, IndAS allows for the expected credit loss method while in GAAP, provisions are to be made for loans that have not been repaid 90 days past the due date.

Post-merger, GNPA/NNPA ratios have now increased marginally to 1.3 percent/ 0.4 percent, on the back of a 22 basis point impact from higher NPAs related to HDFC’s non-retail loans. NPA stands for non-performing assets.

The exact impact of accounting change in bottomline is not clear. Moneycontrol has written to HDFC Bank for a clarification on the same and the story will be updated once we get a reply.