The change in guard at HDFC Bank does not seem to have any adverse impact on the bank and its operations.
India’s largest private lender HDFC Bank will soon be undergoing a massive management change. Aditya Puri the Managing Director and CEO who took office in 1994 will step down in October, to be replaced by Sashishar Jagdishan. The change in guard, however, does not seem to have any adverse impact on the bank and its operations. Global Brokerage and research firm CLSA, after analysing HDFC Bank’s fundamentals with Sashishar Jagdishan has reiterated the ‘Buy’ rating aided by the strong franchise that the bank is. Share price of the lender was trading 0.52% higher at Rs 1,115 per share.
While a large number of lenders in India have been fighting a string of bad loans for the past few years, HDFC Bank has remained better placed. “Low-risk, short-duration, working-capital lending has been HDFC Bank’s corporate lending focus for years,” CLSA said in a note. Although the bank has seen good growth in its corporate book in recent years, most of this lending is towards AAA and AA companies. “HDFC Bank’s wholesale/corporate book has been growing at 15-20% CAGR in the last 10 years and it has remained within 45-50% of total loans,” CLSA added.
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Despite this growth the share of corporate loans, as compared to other segments, remains low for the bank. HDFC Bank’s strategy in lending to corporates has been that of self strengthening. The bank maintains a strong funding profile while strengthening its liquidity and capital position. “As a result, good-quality companies and certain public-sector undertaking (PSU) borrowers have approached the bank for funding rather than the bank chasing growth in this segment,” the report said.
With rural India still having vast growth potential, HDFC Bank too finds growth opportunities, moving to semi urban and rural areas. “The bank is targeting the top 20-25% of rural/semi-urban populations. This segment has a 30-35% credit-deposit ratio, highlighting significant credit under penetration,” CLSA said. The fast paced customer acquisition has seen the bank’s customer on-boarding double in the last 1-2 years.
Although the bank is not immune to the coronavirus pandemic, the impact that it faces could be manageable. A spike in slippages and credit costs for the bank look unavoidable, management believes that the gross non-performing asset ratio will increase from the 1.3% currently but expects it to be contained within 2% of loans. HDFC Bank’s 9% of the total loan book was under the moratorium. The bank has managed to keep an impressive track report in corporate loans, with credit costs remaining at 20-40bp through the corporate credit cycle, CLSA said. “We believe HDFC Bank deserves a premium versus peers, given its higher profitability and stronger underwriting quality,” it added while predicting a target price of Rs 1,450 per share.