A pandemic-era shift to safer, higher-rated assets led to lower margins and interest income in Q4FY22, HDFC Bank told investors. Supply chain issues in the vehicle segment and slowing growth in credit card loans led to a moderate growth trend in retail loans, bank management said.
HDFC Bank’s fourth quarter core net interest margin (NIM) of 4% was among the lowest on record for the lender. Net interest income (NII) growth was also moderate at 10.2% year-on-year (yoy).
Srinivasan Vaidyanathan, chief financial officer of HDFC Bank, told a post-earnings conference call that the bank’s asset mix had shifted to higher-rated segments during the Covid period, but at lower yields. “As a result, NII growth has been weaker, but with the corresponding offset of credit costs which are below the historical average,” he said.
The ratio of NII to credit risk-weighted assets has improved by around 20 basis points from pre-Covid levels and currently stands at around 7%, representing HDFC Bank’s optimized pricing for higher rated segment volumes, Vaidyanathan added. The bank’s provisions fell more than 29% year-on-year during Q4FY22.
HDFC Bank’s loan mix shifted during the pandemic years in favor of wholesale assets, which now account for 55% of the loan portfolio, compared to 45% in 2019. The trend in retail was simply reverse, going from 55% to 45%. pre-Covid. Pricing in the wholesale market has become extremely thin lately as banks attempt to drive higher rated borrowers out of the markets.
Vaidyanathan said HDFC Bank traded NIM for operating costs and credit costs to ensure sustained profitability. The lender has chosen not to take risks throughout the pandemic and it sees margin performance returning over the next three to six quarters. “Retail is coming back, but wholesale has not faltered. We need to seize this opportunity which is good quality. We are fine with that as long as it provides the profitability that we need,” did he declare.
The growth of the distribution segment is penalized by the persistent shortage of supply of semi-conductor chips, vital for car manufacturing. In the fourth quarter, retail lending increased 5% sequentially for HDFC Bank as supply chain issues weighed on vehicle financing. Auto loans increased 9% year-on-year and 4% sequentially. Additionally, credit card customers showed a limited appetite for borrowing. While HDFC Bank’s card spending was up 28% year-on-year, credit card lending was up about 14% year-on-year and less than 5% sequentially, below average bank history.
“We believe the vehicle (segment) should come back once supply constraints ease. For the good part, it’s coming back. The growth rate we had this quarter on vehicles was better than last quarter “Said Vaidyanathan. A similar trend is also occurring in the credit card segment, he said, as the fourth quarter spending and loan growth figures were an improvement from the third. quarter of FY22, when card spend increased 24% and credit card loans increased 9%.