1 min read.Updated: 14 Dec 2017, 08:29 AM ISTAparna Iyer
HDFC Bank came close to getting knocked off when the lender revealed that it was in dialogue with the RBI over labelling a standard corporate loan account as non-performing
Divergence is a dirty word for investors who have put money into banks and indeed, lenders have been punished in the past ever since the Reserve Bank of India (RBI) told them to come clean on these differences in deciding which loans are to be classified as bad.
Stocks of private sector lenders such as Yes Bank Ltd and Axis Bank Ltd that reported large divergences in bad loans have been pummelled and these lenders are trading at valuations far depressed compared to their heydays.
But one lender has so far managed to be left untouched in this sordid saga of divergences—HDFC Bank Ltd. The country’s most valued lender has managed to hold onto the pedestal its investors have kept it on.
Six weeks ago, HDFC Bank came close to getting knocked off when the lender disclosed that it was in dialogue with RBI over labelling a standard corporate loan account as non-performing.
HDFC Bank said it wanted to be fair to its investors, hence the disclosure of the fact that the regulator had differences with it over classifying loans. Keeping good sense, the lender provided Rs700 crore towards the account. Because of this additional provisioning, HDFC Bank’s total provisions surged 62% for the September quarter but the stock took only a mild knock.
Most investors chose to reward the bank for its candid confession although some screamed divergence. An independent analyst, Hemindra Hazari, pointed out that the lender should come clean on its bad loan divergences and said perhaps HDFC Bank cannot continue to trade at a rich multiple of 5.2 times estimated book value for fiscal year 2018. The disputed loan is said to be of Jindal Steel and Power Ltd.
The fact is that the lender has provided for all its bad loans, divergence or otherwise. To wonder if this portends bigger divergences would be a stretch and perhaps harsh on the bank. For now, investors are not ready to give up hope on HDFC Bank, which has rewarded them consistently for more than a decade. This is reflected in the 1.5% gain the stock has managed to chalk up since the divergence came out.
But there is no doubt that HDFC Bank’s immunity towards bad loans has come under threat. In all fairness, the management had warned about this too.
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