Private banks take a knock on asset worries

Mumbai: Most private banks have been perceived as bastions of stability for long by stock investors but that faith has been shaken of late after HDFC Bank’s June quarter results. Deterioration in asset quality of the private lender — among the darlings on Dalal Street — has raised concern among market participants that other stable banks may also be hit by weakening asset quality on account of the business disruptions caused by the second wave of Covid 19.

Shares of HDFC Bank ended down over 3 per cent at Rs 1,472.40 — logging its biggest one-day fall in two months, leading the 1 per cent decline in the Sensex and Nifty. IndusInd Bank, IDFC First Bank,

, Axis Bank, YES Bank, Kotak Mahindra Bank and Federal Bank ended down 1-3 per cent. The Nifty Private Bank index ended down 2 per cent at 18,330.20.

“In the banking sector, each bank will have a different story to tell on the impact of the second wave. Some have faced an issue on asset quality and it has put a question on other banks,” said Mahesh Patil, chief investment officer at Aditya Birla Sun Life Asset Management Company.

There are concerns banks with large retail lending books will be impacted by job losses and closure of several small businesses on account of Covid. The worry is that if the asset quality of HDFC Bank — considered the strongest lender with the lowest bad loans in its books — is not insulated, other banks could take a more severe hit.

“The market is expecting some weakness for other banks on the asset quality side, especially in segments like SME (small and medium enterprises), CV (commercial vehicles) loans or unsecured loans,” said Patil.

In the past decade, HDFC Bank commanded premium valuations compared to most of its peers. But these higher valuations have come under pressure since issues with the banking regulator cropped up over technical outages and ban over new credit card issuances.

HDFC Bank is trading at a trailing price to book value of 3.87 times while Kotak Mahindra Bank is trading at 5.12 times, ICICI Bank at 3.79 times and Axis Bank at 2.68 times. Public sector lender , the country’s biggest, is trading at a price to book of 1.5 times.

Vinit Sambre, head of equities at DSP Investment Managers, said the banking sector will see higher levels of stress because of the second wave and the absence of a loan moratorium.

“This quarter may see higher pain but we anticipate banks will be able to manage this phase well,” said Sambre. “On the whole it should not be a big cause of worry. Valuation premiums may sustain. Overall, the private banks space has managed the pandemic cycle well,” said Sambre.

Despite the disappointing earnings, analysts have retained buy ratings and price targets on HDFC Bank.