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Why analysts are sharply divided over HDFC Bank's unsecured retail loan book

HDFC Bank has been performing ahead of its peers on most parameters but the bank has faced its own challenges. But in the third quarter, it saw gross NPAs inching up.

March 20, 2020 / 02:55 PM IST
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Analysts are divided on their view on HDFC Bank’s balance sheet health with respect to unsecured retail loans. On Thursday, Bernstein analysts downgraded HDFC Bank to underperform citing risks in bank’s unsecured consumer credit portfolio compared with its competitors. Besides, Bernstein, in its report, has also criticised HDFC Bank’s “non-proactive handling” of the management succession process so far.

Further, HDFC Bank's subsidiary HDB Financial services also could pose challenges during this time, given the focus on weaker informal income segments, the report said. Bernstein has cut the share price target by 14 percent to Rs 750 a share. On Friday, HDFC Bank was trading at Rs 853.30 on the Bombay Stock Exchange, down 4.72 percent from the previous close while BSE Sensex was trading nearly flat.

In an analyst call hosted by UBS between HDFC Bank chief financial officer (CFO) and investors too, there were questions on the unsecured portfolio of HDFC Bank. According to those who participated in the call, some of the questions were met with inconclusive answers by the HDFC CFO. In a report post the call, UBS said trends in unsecured retail asset quality are stable. "Eighty percent of the unsecured loans are to salaried employees. This majorly comprised good and strong corporates and government employees," said UBS Securities India in a note. Also, the SME portfolio of the bank was diversified and UBS didn't expect a significant impact on asset quality, the report said. UBS has a buy rating on HDFC Bank with a target of Rs 1,480.

According to Bernstein, HDFC Bank has the highest exposure to unsecured retail credit at 17 percent of its loan book versus ICICI Bank/Axis Bank (9 percent of their loan mix). “While Axis Bank and ICICI Bank have also changed their growth strategy towards unsecured consumer segments, they have a much smaller book and thus, their growth has been recent and off a lower base,” the brokerage said. HDFC Bank’s loan book grew by 19.8 percent to Rs9.4 lakh crore in the third quarter while SME loan book doubled to Rs 1.48 lakh crore.

HDFC Bank has been performing ahead of its peers on most parameters but the bank has faced its own challenges. In the third quarter, it saw gross NPAs inching up to 1.42 percent. The bank did not disclose which sectors have contributed to fresh slippages of about Rs 1,500 crore in the quarter. In a slowing economy, there is a possibility of NPAs spiking and posing fresh challenges to the sector.


Succession plan uncertainty

Part of the reasons why Bernstein has cut HDFC Bank's share target is also due to the uncertainty on the impending CEO succession plan. HDFC Bank has been looking for a successor for Aditya Puri for a while. “An unsatisfactory outcome of the succession process increases the risk of a multiple derating,” Bernstein said. HDFC Bank, which has appointed Egon Zehnder to find a successor to Puri is yet to finalise a name. Among the names that are speculated in the media include outgoing Mastercard CEO Ajay Banga and HDFC bank insiders Sashidhar Jagdishan and Kaizad Bharucha. Paresh Sukthankar, deputy managing director of HDFC Bank and a trusted lieutenant of Puri was seen as a worthy successor to his boss. But Sukthankar surprised the markets by quitting in August, 2018, thereby confirming the ensuing hunt for another candidate.

In a recent interview with CNBC TV18, Puri seemed to suggest that an insider will be better suited as his successor at the bank. "I am rooting for the best candidate. So, I am saying an internal candidate is good because he would know the people, he would know the system, etc. and his acceptability is higher. So, when you go outside, you obviously look for that exception," he said. Puri is also an adviser to the selection committee to identify his successor and he is perceived to have a significant say in the process.

In the interview, Puri had also mentioned that by May, the process of selection of his successor should be over.

But not all is bad

But some analysts have a different opinion on the likely risks in HDFC Bank loan book. “It is true that the unsecured loan book is slightly on the higher side compared with competition. But, I think the panic is overdone. Till the time salaries don’t stop, loan servicing on credit cards and personal loans will not stop,” said Siddharth Purohit, analyst at SMC Global securities.

“Also, one needs to take into account the financial stability of the bank. HDFC Bank, unlike weak private sector banks, have no problem in raising capital,” said Purohit. A similar view was given by Jaikishan Parmar, analyst at Angel Broking. “About 70 to 80 percent of their loans in retail are to salaried employees either in government or corporate sectors. There is no reason for fear mongering,” said Parmar.

Coronavirus impact likely to weigh?

According to analysts, there will be financial ramifications on account of coronavirus impact on the economy in the form of business losses and likely job losses. “With the current COVID-19 pandemic paralysing the world economy, we believe India may be facing significant challenges in handling the health crisis. We believe this may be a catalyst for consumer lending businesses in the country to see far-reaching disruption, both operationally to sustain growth and in maintaining the quality of credit,” Bernstein said in its report.

HDFC Bank, being the consumer finance market leader, has great sensitivity to its bottom line with 24 percent of earnings and 36 percent of its earnings growth contributed by unsecured consumer finance, Bernstein said. Rating agency Crisil, in its report, said an extended outbreak of COVID-19 outbreak could impact consumption sectors in the fiscal year 2021.
Dinesh Unnikrishnan
first published: Mar 20, 2020 02:55 pm
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