Shift to safer assets hits margins and income in Q4: HDFC Bank


A pandemic-era shift to safer and better-rated assets resulted in a hit to margins and interest income in Q4FY22, HDFC Bank told investors. Supply chain issues in the vehicle segment and slower growth in credit card loans have resulted in a muted trend in retail loan growth, the bank’s management said.

HDFC Bank’s Q4 core net interest margin (NIM) of 4% counts among the lowest ever posted by the lender. Net interest income (NII) growth was also subdued at 10.2% year-on-year (y-o-y).

Srinivasan Vaidyanathan, chief financial officer of HDFC Bank, said on a post-results conference call that the bank’s asset mix has shifted towards higher-rated segments during the Covid period, albeit at lower yields. “As a result, NII growth has been lower but with the corresponding offset in credit costs which are lower than the historical average,” he said.

The ratio of NII to credit risk-weighted assets has improved over pre-Covid levels by approximately 20 basis points and is currently at around 7%, representing HDFC Bank’s optimised pricing for higher-rated segment volumes, Vaidyanathan added. The bank’s provisions fell over 29% y-o-y during Q4FY22.

HDFC Bank’s loan mix has shifted during the pandemic years in favour of wholesale assets, which now make up 55% of the loan book, as against 45% in 2019. The trend in retail was just the reverse, falling to 45% from 55% pre-Covid. Pricing in the wholesale market has become extremely fine of late as banks try to lure top-rated borrowers away from the markets.

Vaidyanathan said that HDFC Bank has traded off NIM for operating cost and credit cost to deliver sustained profitability. The lender chose to be risk-off all through the pandemic and it sees margin performance coming back over the next three to six quarters. “Retail is coming back, but wholesale has not relented. We need to get that opportunity which comes at a good quality. We are okay with that to the extent that it delivers the profitability that we require,” he said.

Growth in the retail segment is being hurt by the persistent shortage in supply of semiconductor chips, which are vital for vehicle manufacturing. In Q4 retail loans grew 5% sequentially for HDFC Bank as supply chain issues weighed on vehicle financing. Auto loans grew 9% y-o-y and 4% sequentially. Moreover, credit card customers showed a limited appetite for borrowing. While HDFC Bank’s card spending grew 28% y-o-y, credit card loans grew about 14% y-o-y and under 5% sequentially, below the bank’s historical average.

“We do believe that the vehicle (segment) should come back once the supply constraints abate. For the good part, it is coming back. The rate of growth we had this quarter on vehicles was better than the last quarter,” Vaidyanathan said. A similar trend is playing out in the credit card segment as well, he said, given that the Q4 numbers on spending and loan growth were an improvement over Q3FY22 when card spending grew 24% and credit card loans grew 9%.