How is -60% for Bad Capital Allocation? - Views on News from Equitymaster

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The Equitymaster Research Digest

How is -60% for Bad Capital Allocation?
Apr 27, 2016

  • Stocks slipping with oil
  • StockSelect's new recommendation
  • Rs 120 billion NPA risk looming for banks

I just got off a management call with Mr Paresh Sukthankar of HDFC Bank. The call was to get some clarity on the extent of provisions the bank will set aside in the coming quarters. The very thought of HDFC Bank having to talk about additional provisioning is disturbing. I have tracked its performance for more than a decade. I can vouch for the management's conservativeness in provisioning.

I have written 48 quarterly result analyses for HDFC Bank in the last 12 years, and I can't remember one that worried me. Sustaining credit quality and providing excessively for credit risk came naturally to the management of HDFC Bank. But this quarter was different. The bank had to explain the additional provisioning and give clarity on the impact of forthcoming provisions on its profits.

Why? Well, I will explain that later. But I am talking about HDFC Bank today because it is a stock that fetches a premium for its management's capital allocation skills. For banks, capital allocation is nothing but lending cautiously. Minimising slippages helps them compound the returns on their equity. Something that HDFC Bank has proven all these years.

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