21 July 2020

Investors Bank on HDFC, Although Risks Prevail

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News shaping
the markets today

     

What’s happening: Shares of HDFC Bank Ltd jumped around 9% on the NYSE on Monday, after India's largest private lender reported a spike of around 20% in net profits for the quarter ended June 30.

What happened: With a massive surge in coronavirus cases, most major banks are preparing for defaults on loan repayments.

Although higher revenue from HDFC’s retail banking and treasury division helped the company report solid profit growth, management warned of higher provisions for defaults on loan repayments.

How were the results: HDFC reported growth in net profits for the latest quarter on the back of higher interest income and lower costs.

  • Net interest income climbed 17.8% to ₹156.65 billion ($209.31 million).
  • Net profits surged 19.58% to ₹66.58 billion ($889.11 million), from ₹55.68 billion ($743.99 million) in the same quarter last year.

Why it matters: HDFC’s gross NPAs (non-performing assets) climbed slightly to 1.36% of all loans as of June 30, from 1.26% at the end of the previous quarter. This does not, however, reflect the complete impact of the coronavirus outbreak on loan repayments.

Management said in a statement, “The continued slowdown (in the economy) may lead to a rise in the number of customer defaults and consequently an increase in provisions there against.” The private lender was forced to set aside more funds for writing-off bad loans and for contingencies, and its provisions surged 49%.

On the other hand, HDFC is already witnessing a decline in loan originations and the use of debit and credit cards. The bank’s main retail business remained sluggish, with pre-tax profit plummeting 28%. With a decline in retail activity, fees and commissions plunged 37%.

HDFC curtailed its operating expenses amid lower loan origination, cutting costs by 2.9% in the latest quarter.

How shares responded: Shares of HDFC Bank closed the regular session higher by 9% at $51.51. The stock has gained more than 15% over the past one month but is still down by 19% since year to date.

What to watch: HDFC Bank’s performance in the current quarter is likely to be impacted by the continued slowdown in the global economy, with covid-19 cases surging in the US, India and other parts of the world. Given HDFC’s strong balance sheet and ability to set aside massive provisions to battle out the coronavirus challenges, investors are hopeful of the bank emerging strong from the crisis.

The Markets Today

     

The Canadian dollar will be in focus today, ahead of economic reports scheduled for release later in the day.

Context: The loonie rose versus the greenback to trade around the 1.35 level on Monday, as investors remained optimistic about progress with covid-19 vaccines.

Details: Various pharma companies, including BioNTech, Pfizer and AstraZeneca, are on course to developing a vaccine for covid-19, with positive data being released on Monday.

Canada’s central bank held its benchmark interest rate at 0.25% during its policy meeting on July 15, while announcing plans to continue with its QE (quantitative easing) program.

The Bank of Canada also said that the country’s economy is expected to contract by 7.8% this year, while projecting 5.1% growth in 2021.

Crude oil, one of the country’s major exports, closed higher at $40.81 per barrel on Monday, lending support to the Canadian dollar.

The USD/CAD closed the previous session lower, declining to $1.3534. The forex pair also declined 0.2% to $1.3506 in the European session.

What to watch: Investors await the new housing price index and retail sales data from Canada. New housing prices in Canada are expected to increase 0.1% in June. Retail sales, which dipped 26.4% in April, are projected to surge 20% in May.

Markets will continue to look at the coronavirus numbers, with total infections in Canada approaching the 113,000 mark.

Other Markets: US indices trading closed higher on Monday, with the Dow Jones index, S&P 500 and the Nasdaq 100 up by 0.03%, 0.84% and 2.51%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

New Zealand’s global dairy trade price index as well as the US Redbook index and API crude oil stockpiles.

 

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