India’s largest private sector lender has weathered many a crisis that befell the banking system in the past. HDFC Bank Ltd’s stock has held on to its premium valuations, and has had a buy rating unanimously.

But perhaps it is time to side with the contrarians on the stock, as the Covid-19 pandemic threatens to disrupt the Indian economy. In a warning note, Gautam Chhugani, analyst at Sanford C Bernstein (India) Pvt. Ltd, flagged the key risk of unsecured retail loans of HDFC Bank, terming them as “idiosyncratic risks”. Besides, the bank is preparing for a leadership change during these uncertain times. Therefore, the premium valuations cannot stick any more, he said.

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

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With the pace at which Indian urban centres are edging towards a lockdown to prevent the spread of the virus, Chhugani’s assumptions of a worse-case scenario for the lender may not be very stretched.

The lockdowns are putting small businesses at risk and, perhaps, pushing a part of the working population towards unpaid leave. Even wage corrections seem a possibility after InterGlobe Aviation Ltd, which operates IndiGo, announced a pay cut for its senior employees. This is bound to impact equated monthly instalments and HDFC Bank has a bigger risk than its peers, according to Chhugani.

As the chart shows, HDFC Bank has the highest unsecured portion (17%) of consumer loans, and its retail bad loan ratio has been edging higher over the past five years.

Perhaps investors have sensed this, too. The private sector lender’s stock tumbled nearly 8% intraday on Friday even when the broader market was positive. The stock recovered to close 1.4% down, while the benchmark Nifty ended 5.8% higher.

But bad loan ratios are nowhere close to warranting even raised eyebrows for HDFC Bank. Indeed, analysts at other brokerage firms, such as UBS Securities India Pvt. Ltd, said the bank’s portfolio is not at risk. “Trends in unsecured retail asset quality are stable. 80% of the unsecured loans are to salaried employees. This is majorly comprised of good and strong corporates, and government employees,” said analysts at UBS.

Their assessment of the extent of hit on HDFC Bank may differ, but analysts seem to agree that the uncertainty surrounding the virus outbreak and its impact is weighing on the market. The bank is unlikely to be an outlier in the secular fall.

That said, investors should be wary of its high share of unsecured personal loans. HDFC Bank’s main engine of growth is retail, of which the unsecured portion is a big factor. If a quarter of its profits come from them, according to Chhugani’s estimates, a slowdown will impact the bank’s profitability more than others.

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