FM's bounty on corporate tax props up sentiment for HDFC Bank stock

The bank remains the most recommended 'buy' in the sector; analysts turn watchful on its retail exposure

After a brief spell of underperformance, the HDFC Bank stock touched its all-time high of Rs 1,285, on Monday. This followed the recent bounty from the government, which propped up sentiment for the private lender.

It has gained over 14 per cent since last Friday, when corporation tax rates were slashed. HDFC Bank, which has an average tax payout of 34 per cent, stands to benefit. Analysts at Jefferies expect this relief to bump up net profit of banks in the range of 11-15 per cent, from FY21. 

However, these gains could be pronounced in the medium-to-long-term. 

Investors have a few near-term factors to monitor, nevertheless, such as the quality of the bank’s retail loans, and its overall growth rates. 

Weakness on these parameters, as seen in the June quarter (Q1) results, was one of the reasons for the stock to underperform for a while. 

The overall macroeconomic scenario hasn’t improved significantly, which puts more pressure on HDFC Bank’s unsecured loan portfolio. 

Largely comprising personal loans and credit cards, this segment accounts for about 18 per cent of its retail book, up from 12 per cent in FY15.

These segments have been the major drivers of loan growth in the recent years, and analysts note that credit cost as a percentage of assets under management for this segment has risen from 1.95 per cent in FY15 to 2.11 per cent in FY19. The private lender stepped up its provisioning for delinquencies in its unsecured loan book during Q1, indicating that asset quality pain may stay in the near term. 

Loan growth, which moderated to 17 per cent in the June quarter, is the next point to keep an eye on. 

While numbers for the September quarter are set to be published soon, HDFC Bank could see some moderation on this parameter. 

“Unlike the auto/retail slowdown in FY13-14, retail credit costs have, at present, structurally and cyclically inched up, and we see small bumps in the path of the bank’s retail juggernaut,” say analysts at Nomura, who have trimmed their earnings expectations by 4-5 per cent for FY20-21.

The silver lining is that HDFC Bank remains the market leader in the retail segment, which contributes 53 per cent to its book. 

Though not alarming, the gross non-performing assets ratio, at 1.4 per cent, has risen from the 1 per cent threshold in FY17. Yet, being the best in class, this supports its pricey valuation at 3.9x its FY20 book. Investors seeking fresh exposure, though, could wait for a better entry point.