It's been the country’s most valued bank for years. However, HDFC Bank came under selling pressure, after a rare brokerage rating downgrade on Friday.
After four days of sell-off, equity markets surged on Friday, with the BSE Sensex closing up 1,628 points or 5.75 per cent at 29,915.96. However, HDFC Bank closed down 1.4 per cent to Rs 882.40; the country’s largest private bank was one of the only two losers on the benchmark index.
The reason was a report from Sanford C. Bernstein, which downgraded the lender to “underperform” from “market perform” and slashed the price target on the stock to Rs 750 from Rs 1,400 earlier.
The Bernstein analyst Gautam Chhugani noted that HDFC Bank was a quality franchise and had weathered past crises well. However, in the current scenario driven by the Covid-19 outbreak, the analyst feels there are “idiosyncratic risks” and “unique management challenges.”
“HDFC Bank's portfolio is most exposed to unsecured consumer credit risk versus peer private banks. HDFC Bank's subsidiary, HDB Financial services, also could pose challenges during this time, given the focus on weaker informal income segments,” said Chhugani.
HDFC Bank has the highest exposure to unsecured retail credit at 17 per cent of its loan book, compared with 9 per cent for ICICI and Axis Bank, the analyst noted. He estimates that the unsecured book comprising personal loans and credit cards contributed 24 per cent of net profit and 35 per cent of net profit growth during 2018-19 financial year.
As the share of unsecured consumer book has been increasing, the retail non-performing assets ratio for HDFC Bank, too, has been rising, he pointed.
“Feedback from our credit bureau touchpoints to rising defaults in certain segments such as self-employed and small business retail customers, and lower income salaried base,” said Chhugani.
There are succession-related uncertainties, too. Aditya Puri, MD and CEO, who built HDFC Bank from scratch, is due to retire in October 2020. There has been a lot of speculation whether the lender will promote some one from within the bank, or hire an experienced outsider. HDFC bank, earlier this month, reconstituted the search panel to find his successor.
“The bank's non-proactive handling of the management succession so far could impact the bank's preferred status amongst the investor community,” feels Chhugani.
He expects the earnings growth to slowdown to sub-15 per cent in in the year ending March 2021, in the wake of the Covid-19 pandemic as banks are likely to face operational and credit quality challenges as industries will get disrupted.
The analyst also feels that the succession challenges will impact HDFC Bank’s premium valuations.
Not all analysts though have same views. Swiss investment Bank UBS has maintained a “buy” rating on HDFC Bank with a 12-month price target of Rs 1,480.
Vishal Goyal, the analyst at UBS, says 80 per cent of HDFC Bank’s unsecured loans are salaried employees and trends in unsecured retail asset quality are stable.
“This is majorly comprised of good and strong corporates and government employees. Repayments continue to remain healthy currently,” added Goyal.
The Covid-19 pandemic has hit several sectors like airlines, hospitality and tourism hard. According to Goyal, the bank has low exposure to airlines and limited exposure to restaurants and hospitality businesses.
He also doesn’t expect any significant impact on the asset quality of the bank in the small and medium enterprise segment.
“SME portfolio of the bank is well diversified—geographically and industry wise. 70-75 per cent of SME loans are secured. Bank also has accounts of promoters, employees which help the bank in tracking the health of SMEs,” added Goyal.
The management is also currently tightening the underwriting standards for the bank, said.
