Aditya Puri, managing director of HDFC Bank. (Photo:Reuters) (Reuters )
Aditya Puri, managing director of HDFC Bank. (Photo:Reuters) (Reuters )

Coronavirus impact: HDFC Bank shares tank as Bernstein raises concerns

  • In the current pandemic-driven scenario, HDFC Bank carries some idiosyncratic risks and unique management challenges
  • HDFC Bank is sensitive to its bottomline and has the highest exposure to unsecured retail credit at 17% of loan book

NEW DELHI: Shares of private sector lender HDFC Bank tanked nearly 8% intraday on Friday after global brokerage firm Bernstein downgraded its rating on the stock to underperform, citing risks emanating from the Covid-19 outbreak.

"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, an analyst at Bernstein said in a note dated 19 March.

At 0120 pm on the BSE, shares of the private sector lender traded 1.6% lower at 880.70 apiece, but off the day's low of 826.25.

In September, the brokerage had downgraded rating on HDFC Bank to market-perform citing "rising unsecured consumer risk in a maturing consumer cycle, challenges with management succession, and slowing operating leverage gains due to geographic expansion in the hinterland".

In its latest report, Chhugani said the Covid-19 health crisis may be a catalyst for consumer lending businesses in the country to witness large-scale disruption, both in terms of sustaining growth and in maintaining quality of credit.

HDFC Bank, the report added, the leader in the consumer finance market, has great sensitivity to its bottom line and has the highest exposure to unsecured retail credit at 17% of its loan book compared with 9% for ICICI Bank and Axis Bank.

According to the report, reliance of HDFC Bank’s earnings on the unsecured book has been consistently rising over the past few years. Its share of unsecured consumer loans in its net profit has risen to 24% in FY19 from 21% in FY18 and 19% in FY17.

"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 lender's succession plan as Aditya Puri’s tenure ends in October.

On an analyst call on 18 January, HDFC Bank had said it will likely send a shortlist of candidates to the Reserve Bank of India (RBI) by July-August, seeking approval for a replacement of outgoing managing director Aditya Puri. In November last year, the lender had informed stock exchanges that it kick-started the much-awaited process of finding a successor to its longest-serving chief Puri, whose tenure ends on 26 October.

"It was imperative on the current CEO and HDFC Ltd as a large shareholder to build consensus over the last 2 years. Appointment of an executive search firm seven months before the retirement date is unwarranted and irresponsible process management," Chhugani said in the report, adding that a sub-optimal candidate choice could see a negative reaction from the investor community and could lead to investor de-rating of the stock or rotating preference to banks where investors have greater confidence.

Meanwhile, UBS analyst Vishal Goyal seemed to repose more faith in the bank and its loanbook. In a 20 March note, Goyal wrote that trends in unsecured retail asset quality are stable as 80% of the unsecured loans are to salaried employees.

"This is majorly comprised of good and strong corporates and government employees and repayments continue to remain healthy currently. Small and medium enterprise (SME) portfolio of the bank is well diversified- geographically and industry wise," Goyal wrote.

UBS does not expect significant impact on asset quality because of the pandemic.

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