Does the underperforming largest private bank have any potential?
In March 2020, many brokers had opposing views regarding HDFC Bank, India's largest private sector bank. Among them, Bernstein possessed a 'sell' rating with a price target of INR 750, and UBS had a 'buy' rating with a price target of INR 1,480. The stock was trading at a price of INR 1,135 at that time.
The sell-side analysts were of the opinion that HDFC bank has high exposure to unsecured credit-risk towards borrowers whose salaries were low. However, the buy-side analysts believed that loans were given to people who worked in sound and strong companies, so the default probability is very low. There was another concern of change in the management.
In June 2020, another financial advisory services company named Ambit capital gave the bank an 'under review' status from the previous 'buy' rating, stating attrition and NPA (Non performing assets) risks were high. Then, the very next month, they changed the rating of the stock to 'sell,' fearing lower long-term growth and ROE (Return on equity) compared to the historical trends. Ambit also warned about high senior management attrition after the retirement of CEO and Managing director Aditya Puri. This will lead to a transition and strategy risk.
HDFC Performance:
Over the last two years, when Nifty 50 nearly doubled itself, HDFC bank has gained 67%. According to the reports, a fall in ROE and a rise in NPA were seen. In the last 6 months, when Nifty 50 fell 3%, the stock was down by 8% due to massive FII selling and Ukraine-Russia war. The FII holding came down from 38.3% to 37.5% in December 2021 against three months earlier.
In January 2022, the brokerages felt that HDFC bank was looking good in many aspects. Jefferies, one of the brokerages who gave a negative rating on the bank in 2020, stated that 2022 could be HDFC bank's comeback year and gave a target of INR 2070 if the bank can continuously maintain the retail/SME loan growth momentum (5% q-o-q and 16% y-o-y in Q3 FY22).
In the past two years, although the bank was experiencing high pressure on its ROE, it maintained its market share in deposits and payments. HDFC Bank is now trading at a good valuation of a P/B (Price to Book value) 3.30 with an ROE of 16.9%, whereas the Bank Nifty is trading at a P/B of 2.69 and an ROE of 12%. Value fund managers are also picking up this stock due to the availability of the stock at the right valuation in an inflationary environment.
But is everything that easy? Actually, no, it is not as easy as it seems. There are challenges to maintaining the profit pools when many new-age companies have come up to take a bite of the pie, as well as challenges in controlling NPA and tech related issues due to which RBI banned the bank from issuing new credit cards until it fixes the problem. There is another point of transition in leadership after Aditya Puri's retirement in October 2020.
Earlier it was expected that Paresh Sukthankar would become the successor of Puri. However, in 2018, he resigned. So, the next best choice available to become the successor was the then CFO Sashidhar Jagdishan. He is known to be humble and modest. But to take charge of leadership from being a CFO takes time, and also he would be compared to Puri, and it would also take time to prove himself a great leader. After this transition, the attrition is also stabilizing. So, the transition in leadership issue is under control, but the next challenge is the operations.
NPA the major fear:
One of the main concerns was the increasing NPAs, which analysts feared in March 2020. In December 2020, the bank's NPA was at 0.09%, which went up to 0.37% or up 28 basis points. Although these numbers in a void look scary, they have one of the best asset qualities among its peers (Kotak Mahindra bank's 29 basis points increase in NPA, ICICI bank's 22 basis points increase in NPA). Apart from this, the bank, due to repeated outages at its data centre, faced glitches in its digital banking services. In December 2020, RBI ordered a ban on issuing new credit cards until it fixes the issue. The ban was lifted in March 2022, which led to a huge loss for the bank considering the fact that this segment of their business earned them 14%-22% per month from the EMI payments of credit-card bills to all the fees and charges related to credit cards. HDFC Bank was the leader in issuing new credit cards; they issued more than a million cards per year. So, this ban of 15 months cost them nearly 1.5 million new credit cards.
Currently, the senior management attrition rate has been moderated, and RBI also lifted the ban on issuing new credit cards, and the bank's good valuation gives a positive signal. The bank is heading towards a new set of challenges under the guidance of the new management in a new environment. Although, one important thing that needs to be in the mind of the investors is that the future is not exactly like the last time so the expectations also should be kept in check.