HDFC Bank: Steepest single-day fall, gains wiped off; caution warranted

On Wednesday, the private lender's stock saw its steepest single-day fall of 9.9 per cent in nearly 12 years; it is down 33 per cent since all-time high

When banking stocks, irrespective of their strength or size are falling like nine-pins, one cannot expect HDFC Bank to remain an exception. With a fall of 9.9 per cent, which is also its steepest since July 2008, gains accumulated by the HDFC Bank stock over two years have been wiped off.

What’s more, despite being reckoned as the most recommended ‘buy’ among banking names, it hasn’t been able to prevent the fast melting down from its all-time high, given the 33 per cent fall during this period.

The question is whether investors should consider HDFC Bank’s latest closing price of Rs 878.50 a share, which translates to 3.2x FY21 estimated book value, as a good enough level to turn positive on the stock.

Undisputedly, with the lowest ratio of gross non-performing assets (NPA) in December quarter (Q3), odds stack up in the bank’s favour. Yet, investors shouldn’t take their eyes off some critical aspects, which haven’t been favouring the bank lately.

First, is that of loan growth, particularly in the retail segment, which accounts for 60 per cent of its loan book. In fact, what kept the growth brisk in Q3 was a faster 37 per cent growth in corporate loans, vis-à-vis 14 per cent growth in retail loans. Given that the economic slowdown has further deepened and with businesses lately functioning at reduced efficiencies due to the spread of Covid-19, analysts believe the bank could be vulnerable to more slowdown in the March quarter. “Around first week of April when the bank publishes its deposits and loan growth data, it would help investors take an informed call on the stock,” says an analyst from a foreign brokerage. Until then, the analyst feels that it is better for investors not to take fresh positions in the stock.

Source: Brokerage reports

Another reason for the apprehension is that of asset quality. While there is little to complain on this front, slippages or loans turning bad have steadily been on the rise. Consequently, analysts at IDBI Capital point out that credit cost too has been inching up, though not at an alarming level. Investors should also be mindful that HDFC Bank has the highest share of unsecured loans (credit cards and personal loans) at 27.6 per cent of its retail loan book, among front-line private banks. Whether the bank can strive to keep its asset quality under check in a tepid economic growth situation needs monitoring.

In this context, while the correction in HDFC Bank stock appears attractive for investors, ignoring some of the fundamental concerns around it could be foolhardy.