The underperformance of HDFC Bank makes it appealing. Should you buy now or hold off for a while in 2022?

Synopsis

There has been a lot of bad news about HDFC Bank for the last two years. Even its price has gone down compared to other big private banks, and analysts say it may not grow as quickly as ten years ago despite the stock’s low price. Investors: Will HDFC Bank be able to get back to where it was?

There were two different opinions about the largest bank in India’s private sector, HDFC Bank, in March 2020. There was a “sell” rating from Bernstein, with a target price of INR750, and there was a “buy” rating from UBS, with a target price of INR 1,480. This is how much the stock was worth.

Gautam Chhugani, the analyst at Bernstein, made a simple point. In his report, he said that HDFC Bank is the bank with the most unsecured credit risk for people who make less money. But Vishal Goyal, the head of UBS, had a different idea. As he said, the loans were given to people who worked for good and well-known firms.

There were never any problems with the loans paying back, he said. He said that repayments were still going well for both retail and small business loans, which was good news for both. Even Chhugani, who had called out the new bank’s bluff, said there were problems with the new management. Goyal, who had already called out the bank, was more optimistic.

In June 2020, Ambit put its “buy” rating on HDFC Bank under review because it thought the risk of attrition and non-performing assets (NPAs) was very high. The following month, it downgraded the stock to “sell.” It said it thought the long-term growth and ROE (return on equity) would be lower than in the past.

It felt the ROE gap between HDFC Bank and other big banks would close to 250 bps, so it thought the 25% premium was too high. Ambit also said that the long-term CEO and managing director, Aditya Puri, was retiring, putting the bank at risk of losing a lot of senior managers, especially when the outside world was terrible.

They used to think that HDFC Bank was wrong, but now they feel that it is good.

The report on how well things went

In two years, a lot has changed: The Nifty 50 is now more than twice as big, but HDFC Bank has grown by 67%. As these reports said, HDFC Bank did see a significant drop in its ROE and a big rise in NPAs, which led to the stock price.

The Nifty has dropped 3% in the last six months, but the stock has fallen 8%. The market thinks that FIIs are selling Indian stocks as US interest rates rise and the Ukraine-Russia war continues. In December 2021, the FII holding in the stock had dropped to 37.5 percent, down from 38.3 percent three months before. HDFC Bank makes up 8.5% of the Nifty 50.

The brokerages that said the bank was putting a lot of bad debt on its balance sheet now think it looks good on many different fronts. On January 5, 2022, Jefferies said that this could be a good year for HDFC Bank, and they set a target price of INR2,070. It could be a good year for HDFC Bank in 2022 if it can keep up the growth in retail and small businesses, which will help the bank’s bottom line, and improve its processes and compliance. During the third quarter of FY22, HDFC Bank’s loan growth rose 5% q/q and 16% y/y, thanks to a rise in retail and commercial/SME loans.

In 2020, Jefferies gave the bank a lousy review.

For the last two years, the bank’s ROE has been under stress, but it has kept its market share in deposits and payments. Even problems with technology are being solved. HDFC Bank now has a P/BV (price to book value) of 3.30 and an ROE of 16.9%, which is a good value. At a P/BV of 2.69, the Bank Nifty has an ROE of 13%.

Value fund managers think the bank is going to do well. Recently, other people have snapped up SBI Mutual Fund’s shares. ET Prime spoke with fund managers who think the most important thing is that the bank is now available at the right price when there is a credit uptake and an inflationary environment. This is what they think.

It’s been a while since HDFC Bank’s prices dropped, but now it looks like a good deal. Profit pools for banks are under pressure from new-age businesses, says Ravi Dharamshi, the CIO of ValueQuest Investment Advisors, a company that invests in small businesses.

Despite this, the bank is losing market share in personal and auto loans, and it has only been able to keep its credit card position for 2021. As a result, some of these points have been raised by analysts since FY20.

Change of guard and how it affects the people who live there

Puri will step down as CEO and managing director in October 2020, after 26 years. Under his leadership, the bank had grown and made a lot of money for its investors. Trust in Puri’s bank meant that the stock didn’t move right away when he left. Because the bank hasn’t done well two years after it opened,

Analysts and the media used to think that Paresh Sukthankar would replace Puri, which fit in with their story. However, between 2015 and 2019, Puri and Sashidhar Jagdishan, the then CFO, began working together. In 2018, Sukthankar stepped down.

When the time came for a new person to take over, industry insiders said it was hard for them to find someone to take over. Sukthankar didn’t want to come back, and Jagdishan was the best choice that could be made.

There were two things that Jagdishan had to deal with before he took over. The RBI had already raised them, and both have now been solved. He is also trying to become a leader. An old-timer at the bank, he is known for being humble and polite. A letter from last year said he was sorry for the problems with IT. He went on to say that he was sorry for them.

They think Jagdishan will always be compared to Puri, and it will be a long time before he can show that he is better than Puri. Another different thing was how Puri worked.

“To become a leader from being a CFO takes time. People have already taken care of the first set of problems, two RBI problems. Second, people have to be willing to follow. There is no opposition, but he doesn’t have the same clout as Puri did, says an industry expert who asked not to be named.

“Aditya Puri had a persona that was bigger than life.” It’s also an excellent way to show how good he is at making things work without always needing him. So far, “I haven’t made up my mind,” says Dharamshi. Filling Mr. Puri’s shoes was always a big job for the new manager.

There are two problems: a rise in NPAs and a rise in RBI rap

With some big and small names leaving the bank, the real problem is how the bank is run. In March 2020, new NPAs will start. 0.09 percent of the bank’s assets were not paid back in December 2020, which rose to 0.37 percent, or 28 percent. There were also 29 bps and 22 bps from Kotak Bank and ICICI Bank, which was in line with them both. Banks aren’t always the best at managing their assets, but the bank is still one of the best.

In December 2020, the RBI told HDFC Bank to stop launching new digital business-generating activities and look for new credit card customers because its data center had been down for a long time.

In December 2020-end, the RBI stopped HDFC Bank from giving out new credit cards. This ban was only lifted in March 2022, though. This caused a lot of money to drain because the segment makes between 14% and 22% a month from EMI payments on credit-card bills and late-payment penalties. The market leader for new credit cards until the end of 2019 was HDFC Bank, and it gave more than 1 million cards each year. During those 15 months, HDFC Bank was banned from giving out credit cards that could have cost 1.5 million people money.

“Churn in top management has slowed down, and the RBI has lifted all IT bans.” The bank’s current valuation and strong franchise, “we turn positive,” says the most recent Ambit report. It adds that it could be the best-performing one for two years.

The sweet spot for value

There is now less of a gap between the value of HDFC Bank (3.77) and its peers ICICI Bank (3.15) and Axis Bank (3.96) than there was before. At the beginning of 2022, Ambit said the stock was a “buy,” and they set a target price of INR1,650 for it to reach.

HDFC Bank has a P/E ratio of 20.5, which isn’t very high compared to the banking sector’s P/E of 20. 2. Kotak Mahindra Bank, owned by a private company, has a high P/E of 46.7 at its current market price of INR1,790.

In December 2020, Kotak Mahindra Bank had prices of INR2,000. By December 2021, they had dropped to INR1,890. Toward the end of February 2022, it was at INR1,842 levels. That was when the conflict between Russia and Ukraine had been going on for a week.

However, one stock has broken the trend, with its share price doubling over the last year. This is the State Bank of India, a company in India (SBI). In 2022, the bank’s P/E is 14.5, which is lower than the banking sector’s P/E of 20.2. This makes most analysts think the stock has more potential. If you look at HDFC Bank’s one-year forward PE of 20.5x, it’s still a good deal. It’s trading at a 17% discount to its three-year rolling average PE or a 15% discount to its three-year rolling average P/BV, which makes it a good deal.

Ambit says that even when HDFC Bank is compared to other big private banks, its premium has dropped to 34%, down from 54% over the last five years. While the bank is available at a lower price, it hasn’t grown as quickly as ten years ago.

The outlook is

The bank is now in a new place with new challenges and a new manager. Investors will have to lower their expectations for HDFC Bank because the future will not mirror the past, so they will have to do that. To be a good sign for the bank: If analysts at Ambit, Bernstein, and UBS, who have a better look at the details, keep changing their minds about the bank, that is a good thing.

Will the gold standard of Indian banking get back on track?

“I don’t think there will be much drop in the stock price.” People can start buying at these prices. If you’re an analyst, Ambareesh Baliga says that it’s been stable over the years and that most of the time, “it has surprised us.” It may not grow as quickly as it has so far, though. Over the next five years, the revenue could increase by 15% to 16%.