Bernstein downgrades HDFC Bank on unsecured credit, succession plans

The brokerage lowered the bank's rating to 'underperform' from 'market-perform' earlier, and lowered target price to Rs 750, from Rs 1,400

HDFC Bank stocks fell after brokerage house Bernstein downgraded the bank on exposure to unsecured consumer loans amid a Coronavirus induced slowdown, and on “non-proactive handling of the management succession so far.”

The brokerage lowered the bank’s rating to ‘underperform’ from ‘market-perform’ earlier, and lowered the target price to Rs 750, from Rs 1,400 earlier.

“In the current pandemic driven environment. we believe HDFC Bank carries certain idiosyncratic risks and unique management challenges,” wrote Gautam Chhugani, analyst with Bernstein, adding, the bank’s portfolio is “most exposed to unsecured consumer credit risk versus peer private banks.”

The brokerage noted that 24 per cent of earnings and 36 per cent of HDFC Bank’s earnings growth were contributed by unsecured consumer finance and that unsecured retail credit is 17 per cent of HDFC Bank’s loan book. In comparison, peers ICICI and Axis Banks have 9 per cent of their book in unsecured retail credit. Kotak Mahindra Bank is defensive in its growth in retail unsecured credit and has been highlighting rising risks in unsecured consumer finance for the past two quarters. HDFC Bank’s subsidiary  HDB Financial services also could pose challenges as it is focused on weaker informal segments.

The brokerage also said while HDFC Bank has weathered past crisis well and has been a favourite with foreign investors, success plan is a problem area.

“HDFC Bank's impending CEO succession and lack of proactive planning, sets up the bank to lose its sheen with investors who would have preferred less uncertainty. An unsatisfactory outcome of the succession process increases risk of a multiple derating,” the analyst wrote.

The bank’s shares were down 2.90 per cent at Rs 868.85 a piece on the BSE.