HDFC Bank trails markets for first time in 7 years

Shares of HDFC Bank Ltd underperformed benchmark indices in 2020 for the first time in seven years as the covid pandemic increased wider investor concerns over the asset quality of banks.

Shares of HDFC Bank gained 11.09% in 2020, the private lender’s worst performance since 2013, according to data from Bloomberg. So far this year, Sensex and Nifty have gained 14.79% and 14.01%, respectively.

To be sure, year to date, the Nifty Bank index, Nifty Private Bank index and Bankex index have fallen 5.5%, 5.6% and 4.8%, respectively. Interestingly only a handful of stocks in the banking services sector are set to see off the year with gains. Except HDFC Bank, Kotak Mahindra Bank (up 16%), Bank of Maharashtra (up 3%), all stocks in BSE Bankex will end 2020 with losses.

So far this year, IndusInd Bank is down 44%, RBL Bank 35%, Bandhan Bank 22%, State Bank of India and Axis Bank have lost 20% each while ICICI Bank has lost 5%.

“2020 has been a roller coaster for financial stocks. The year started off with investors’ optimism on growth and asset quality but these got punctured by covid, and towards the end saw such concerns dissipating. The stocks behaved in a similar fashion, but interestingly, some large private banks and NBFCs/HFCs with resilient business models (robust customer segment, underwriting, collections and distribution) have either surpassed or are trading near their pre-Covid price levels. The likes of HDFC Bank, Kotak Mahindra Bank, ICICI Bank, HDFC, Bajaj twins and Cholamandalam Finance have led the recovery in financial sector stocks,” said Rajiv Mehta, lead analyst-institutional equities, Yes Securities.

Mehta said sustained economic recoveryrepresents a conducive business backdrop for lenders and that the rally and recovery in financial companies’ stock prices should continue in 2021. Analysts at Nomura feel the earnings upgrade cycle for private banks will continue and prefers HDFC Bank among others.

“We remain positive on financials as we think the asset quality impact of covid may not meaningfully spill over beyond first half of 2021 and investors will gain confidence on the asset quality cycle. We see a good chance for credit cost undershooting for FY22F; hence, the earnings upgrade cycle will continue,” the foreign brokerage firm said in a note on 18 December.

However, overhangs on HDFC Bank remain.

Recently, RBI ordered HDFC Bank to temporarily halt sourcing of new credit cards and stop the launch of its digital business generating activities after its digital services were disrupted for over 12 hours from the evening of 21 November.

“We believe that RBI is indicating a non-tolerant stance towards technological lapses in the banking infrastructure. Given HDFC Bank’s dominant status in payments/credit cards and its strong commitment to tech-enabled growth, this development comes as a negative surprise,” said JM Financial Institutional in a note to its investors.

HDFC Bank had 14.98 million cards in issue as of September 2020 (25.5% market share) and the card base grew at a CAGR of 17% (in volume) from FY17 to September 20.

“We believe this issue could take 3-6 months to resolve and thus could impinge on growth of this portfolio (5.5% of loan book)”, JM Financial added.

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