Is HDB Financial Services A Burden to HDFC Bank or Burdened by It?


Even though the net income for the quarter ended June 30, 2021 (Q1FY22) was almost flat at ₹ 1,655.8 crore compared to ₹ 1,609.7 crore for the quarter ended June 30, 2020 (Q1FY21) (1), for HDB Financial Services, the profits earned during Q1FY22 ₹130.6 as against₹232.7 crore earned during Q1FY21 signify a sharp drop of 43.9 %.

The Wakeup Call: The real alarm bell for the investors rang when the Gross Non-Performing Assets (GNPAs) of HDBFS almost doubled in a single quarter (Q1FY22)(1). Even though the capital profile of the NBFC is still robust with Capital Adequacy Ratio (CAR) at 19.8 %and Tier-I CAR at 14.9 %, HDBFS no more enjoys the same valuation it once enjoyed.

The Reasons

Not Just for Pandemic: The second wave of Covid-19 has supposedly affected the business volumes and collections in the quarter. As the loans in risky segments like real estate, personal loans, microfinance, loans to SMEs and vehicle finance account for around 30% of the loans from NBFCs, their NPAs rose by 40 to 50 basis points during the quarter ended March 2021. The Credit Rating Agency ICRA (2) in June estimated that NPAs of NBFCs would rise by 50 to 100 basis points in the first quarter due to the second wave. But the rise in NPAs of HDBFSL is much more than what could be factored in and justified by the estimations above.

Let’s compare the performance of HDB Financial Services with that of the leader Bajaj Finance (3).                                                                                                         

NBFCQ1FY21 ₹ in croreQ1FY22 ₹ in crore% Rise in profitsGross NPAs as on 30 June 2020Gross NPAs as on 30 June 2021Rise in Gross NPAs
Bajaj Finance (4)₹962₹1,0024.2 %1.79 %2.96%65%
HDB Financial Services232.7130.6– 43.9 %2.86 %7.75%171%

The Burden of the Sponsor Bank: Banks across the globe launch NBFCs to cater to those customers whom the bank may not be able to serve with their norms. Hence the asset quality of such NBFCs that are launched by banks can’t be as good as those of the banks that sponsor them. If a borrower’s rating is high, he would approach the bank instead of NBFC launched by it. Such NBFCs are also obligated to help their parent banks in maintaining their asset quality, by purchasing their potentially bad assets. Hence their asset quality can never match independent NBFCs like Bajaj finance or Sriram Transport which have no such obligations.

What Does It Mean To HDBFS?

As the company doesn’t enjoy the kind of high valuation anymore, even after the price drop (5) from ₹ 1150 to below ₹ 900 per share, there are no substantial takers. So, its listing, which was speculated to be impending, is not going to happen anytime soon.

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Discussion Questions

Do you think NBFC is a safe investment? Why?

Source Articles

1. Lele, Abhijit. HDB Financial Services Q1 net profit nosedives on Covid-19 impact. Business Standard. July 17, 2021.

2. Rebello, Joel. NBFC stress to increase after second wave but disbursements will pick up: ICRA. The Economic Times. June 28, 2021.

3. News, Money Control. Bajaj Finance Q1 results: Key highlights from the company’s earnings concall. July 21, 2021.

4. News, LiveMint. Bajaj Finance Q1 net profit rises 4% to ₹1,002 crore; NII up 8%. July 20, 2021.

5. Karthik, Hamsini. HDB Financial: how Aditya Puri’s dream IPO is now HDFC Bank’s headache. The Economic Times. Aug 4, 2021.

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