Stock Fundamentals

HDFC Bank’s attractive valuation makes it a good long-term buy

Radhika Merwin | Updated on March 29, 2020

While there could be near-term challenges, the RBI’s recent measures and the bank’s strong financials offer comfort

It has been a hellish past month for the Indian stock market.

Investor wealth has eroded sharply, with many large-cap stocks also falling like ninepins and recording multi-year lows.

In this market mayhem, banking and finance stocks have been the worst hit, with marquee names also coming under intense selling pressure.

HDFC Bank, one of the most resilient stocks backed by sound financial performance in recent years (amid multiple challenges in the banking sector), was among the bluechip stocks that took it on the chin over the past month.

At its lowest point, the stock lost 35 per cent in March alone; though the recent rebound in the market has helped recoup some of the losses.

However, the stock is still down 23 per cent since the beginning of March.

Valuations have also corrected sharply from 4.5 times price- to-book a year ago to 2.5 times currently.

Is it a good time to stock up HDFC Bank?


Near-term challenges

There are several points that investors need to keep in mind while considering banking and finance stocks now. One, with the Covid-19 threat increasing and impacting growth of businesses in India, the banking sector is likely to witness a sharp slowdown in growth and earnings in the coming quarters.

Two, banks with relatively higher exposure to unsecured consumer loans and SME loans may be more impacted by the ongoing turmoil.

Three, FPI holdings in many finance stocks are significant, and continued massive sell-off by foreign investors, as in the past month, could continue to weigh on these stocks.

HDFC Bank, too, can face some of these near-term challenges.



HDFC Bank’s retail loans constitute 52 per cent of it loans (as of December 2019). Of the total retail domestic loans, credit cards and personal loans constitute 35 per cent, which is relatively higher than the exposure that its peers such as Axis Bank and ICICI Bank have to these unsecured loans (15-17 per cent).

HDFC Bank’s credit card portfolio stood at about ₹57,000 crore as of December 2019. Hence, the worry among some investors has been that if the economic environment deteriorates sharply here on, huge job losses could increase the risk of defaults in unsecured consumer loans.

But for HDFC Bank, there are several factors that offer comfort. According to a note put out by UBS post-concall with HDFC Bank (on March 20), 80 per cent of the bank’s unsecured loans are to salaried employees, mainly government employees or working in good and strong corporates .

This should mitigate the risk of default to some extent.

Also, the bank’s SME portfolio is well- diversified — geographically and industry-wise; and 70-75 per cent of SME loans are secured. The bank has low exposure to airlines and limited exposure to restaurants and hospitality business.

Above all, the RBI’s recent measures — three-month moratorium on payment of instalments on terms loans and deferment of interest on working capital facilities — should offer some comfort to borrowers.

Forbearance on asset quality classification for such loans will also help banks.

Strong fundamentals

Near-term risks aside, HDFC Bank continues to be a solid bank with sound fundamentals.

Over the past few years, even as its peers have been weighed by asset quality issues, HDFC Bank has managed to keep its bad loans under check and earnings in good stead.

Between FY16 and FY19, the bank’s loans grew about 21 per cent CAGR. A steady net interest margin and fairly stable asset quality led to a healthy 20 per cent CAGR growth in profit between FY16 and FY19.

A well-balanced loan mix has helped the bank deliver healthy growth despite challenges within retail and corporate segments in certain periods. For instance, while growth in corporate loans slowed in FY17 and FY18, a strong retail loan growth of 26-27 per cent during these years aided the overall loan growth.

In FY19, corporate loans led the growth in the bank’s overall loans, even as retail loan growth slowed down considerably. In the latest December quarter, loan growth came in at 20 per cent, with corporate loans growing 29 per cent and retail by 14 per cent. The slowdown in retail loans was led by segments such as auto, two-wheeler, CV and construction equipment.

While HDFC Bank’s GNPA as a per cent of loans has only marginally inched up to 1.42 per cent in the December quarter (from 1.38 per cent in the September quarter), bad loans in absolute terms increased by 23 per cent y-o-y.

The bank has been facing stress in its agri portfolio. However, it holds floating provisions of ₹1,451 crore and contingent provisions of ₹1,457 crore (as of December 2019), which lends comfort.

The bank is also well capitalised to fund growth over the medium term. Its total capital adequacy ratio stood at 18.5 per cent as of December 2019, against a regulatory requirement of 11.075 per cent (including capital conservation buffer and an additional requirement of 0.2 per cent on account of it being identified as a Domestic Systemically Important Bank).

Tier 1 capital adequacy stood at 17.1 per cent, against the regulatory requirement of 8.875 per cent.

Published on March 28, 2020

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