The HDFC Bank management told analysts on Thursday that it does not expect a significant impact on its asset quality as a result of lock-downs amid Covid-19 outbreak. While credit card spends at the bank held steady in the first two months of 2020, they dropped in March, the private sector lender said, adding it is tightening underwriting standards.
The lender’s American depository receipts (ADRs) slumped 12% on the New York Stock Exchange (NYSE) on Wednesday, prompting the management to speak to analysts.
The share price of HDFC Bank has fallen 31% between January 1 and March 20; most banking stocks have taken a beating, especially over the last week, with loan portfolios expected to deteriorate following the Coronavirus crisis. The concern stems from the assumption that HDFC Bank's asset quality will worsen due to the current state of near lockdown in some parts of the country.
HDFC Bank is a retail-focused bank, with retail loans accounting for 52% of the loan book, and has executed its strategy almost flawlessly over the last 20-odd years.
The bank clarified that 70-75% of its exposure to small enterprises-a particularly vulnerable segment-is secured and that it has limited exposure to airlines, another segment that would be badly hit by the slowdown. The management is currently tightening its underwriting standards for credit cards.
UBS analysts wrote: "People have shifted to online spending and food delivery and online spending has increased. But in the case of complete lockdown, the HDFC Bank management expects a decline in customer spending."
Following the call, Bernstein downgraded the stock as their analyst believes that the bank is the most exposed to unsecured consumer credit versus other private peers. The report pegs the share of unsecured retail credit in HDFC Bank’s book at 17%. The share is an equally high 16% for Kotak Mahindra Bank, which has a much smaller balance sheet than HDFC Bank. The share is much lower at 9% for ICICI Bank and Axis Bank but a higher 15% for IndusInd Bank. Investors have been concerned, for more than a year now, about the lender's succession plan, which is yet to be announced.
Analysts at Bernstein said: "We believe Covid-19 will have a non-trivial impact on the Indian economy, even though the outbreak intensity so far does not point to a Europe or US-like scenario. But given the population size, density, community awareness, quality of infrastructure and global interlinkages, Indian businesses will still undergo disruption. Consequently, banks are likely to face operational and credit quality challenges."
HDFC Bank's shares ended 1.39% lower on the BSE at Rs 882.40 on Friday.