India's third-biggest lender by assets HDFC Bank posted its slowest quarterly profit growth in a decade due to a drop in net interest margins and losses in its investment portfolio, sending the bank's shares down as much as 3 per cent.
HDFC Bank's conservative lending has helped it outperform local peers struggling with rising bad loans such as State Bank of India (SBI) and ICICI Bank. Until the quarter ended September, HDFC had reported quarterly profit growth exceeding 30 percent for the last decade.
Net profit rose 27 per cent from a year earlier to Rs 19.8 billion in the quarter ended September 30, HDFC Bank said on Tuesday. That was in line with analysts' expectations, according to Thomson Reuters I/B/E/S.
While net interest income gained nearly 15 per cent to Rs 44.8 billion, the bank's loan book grew at a slower pace than expected by some analysts as the economy expanded the least in a decade. HDFC Bank's net interest margin, which measures loan profitability, also shrank.
Analysts expect the coming quarters to remain subdued for Indian lenders, including HDFC Bank, which has a forward 12-month price to earnings ratio of 16.6 times, the highest among the country's big banks.
"There are two major worries - loan book growth has been in line with the system, although they had guided for faster growth," said Manish Ostwal, banking analyst at Mumbai-based brokerage KR Choksey.
"Secondly, margins have declined on a sequential basis. That shows that newer business is being done at lower margins and its ability to pass on costs is not so strong."
The bank's loan book grew 16 per cent from a year earlier, while net interest margin narrowed to 4.3 per cent from 4.6 per cent in the previous quarter and 4.4 per cent a year earlier.
HDFC Bank cut lending rates to attract borrowers ahead of the festive season in October-November but kept deposit rates high to retain savings in a tight liquidity environment.
Asset quality at India's third-biggest lender behind SBI and ICICI also worsened. Gross nonperforming loans as a percentage of total assets rose to 1.1 percent from 0.9 percent a year earlier, HDFC Bank said.
The bank also posted a Rs 1.03 billion loss in its treasury income, or the return on investments in bonds and other financial instruments. That compares with a gain of Rs 485 million a year earlier.
HDFC Bank booked mark-to-market losses on its bond portfolio in the second quarter as market yields rose 133 basis points. Emergency measures by India's central bank in mid-July to support the rupee led to a spike in bond yields.