HDFC Bank: Tough challenges ahea

HDFC bank, India’s second largest private sector lender, was expected to withstand the ongoing carnage on bourses.

In fact, being a quality franchise, it has weathered crises well in the past and has often been seen as a safe haven. However, in the current pandemic driven environment. HDFC Bank carries certain risks and unique management challenges.

HDFC Bank’s portfolio is most exposed to unsecured consumer credit risk versus peer private banks.

HDFC Bank’s subsidiary HDB Financial services also could pose challenges during this time, given the focus on weaker informal income segments.

Further, the bank’s non-proactive handling of the management succession so far, could impact the bank’s preferred status amongst the investor community.

It is believed that 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.

For FY’21E, HDFC Bank’s earnings growth is expected to slow down to sub-15% growth. The succession plan challenges are also likely to impact its premium valuation multiples.

The expectations of 33% compression of its 1 year forward target multiple to13x earnings, compared to its 5-year long term average of 21x earnings, are proving to be the major headwind going forward.

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