Foreign brokerage Bernstein has downgraded HDFC Bank over concerns that consumer exposure and succession pose a risk for the private lender, amid the Covid-19 outbreak. HDFC Bank’s portfolio is most exposed to unsecured consumer credit risk, compared to other private banks, while its non-proactive handling of the management succession so far, could impact the bank’s preferred status among the investor community, warned Bernstein.
HDFC Bank’s shares fell as much as 7.8% intraday on Friday, while HDFC ADR was down over 10% overnight, after Bernstein downgraded it to underperform. The stock ended at ₹882.40, down ₹12.40, or 1.39%, on the BSE.
“HDFC Bank, being a quality franchise, has weathered crises well in the past and has often been seen as a safe haven. However, in the current pandemic-driven environment, we believe HDFC Bank carries certain idiosyncratic risks and unique management challenges,” Gautam Chhugani, analyst, Bernstein, wrote on 19 March.
The brokerage expects earnings growth to slow to below 15% in FY21 after factoring in the succession challenges to impact its premium valuation multiples.
“We expect a 33% compression of its 1-year forward target multiple to 13 times earnings, compared to its 5-year long term average of 21 times earnings.” Chhugani said the Covid-19 crisis may be a catalyst for the bank’s consumer lending businesses in the country and may see far-reaching disruption, both in terms of sustaining growth and in maintaining quality of credit. HDFC Bank, the report added, has great sensitivity to its bottom line and has the highest exposure to unsecured retail credit at 17% of its loan book versus 9% for ICICI Bank and Axis Bank.
According to the report, the reliance of HDFC Bank’s earnings on the unsecured book has been consistently rising over the past few years.
The lender’s share of unsecured consumer loans in its net profit has risen from 19% in FY17, to 21% in FY18 and 24% in FY19.
“Going forward, if HDFC Bank slows down on the unsecured book, there are limited growth engines that can substitute both in scale and profitability,” it said. The report also raised concerns regarding the succession plan as managing director Aditya Puri’s tenure ends in October. On an analyst call on 18 January, HDFC Bank had said it is likely to send a shortlist of candidates to the Reserve Bank of India by July-August, seeking approval for a replacement of Puri.