The turbulence in the stock market over the past few days has been widespread, leading to a steep fall in stock prices across sectors and market capitalisation.

But banking stocks have been plummeting at a faster pace than the broader indices since January. While the Sensex has lost 31 per cent so far this year (up to March 19), the S&P BSE Bankex has fallen 38 per cent. About two-third of the bank stocks have fallen 40 per cent and above since January, indicative of the widespread sell-off in banking stocks.

However, over the past week, the fall has been led by private bank stocks. Marquee names such as HDFC Bank (down 10 per cent between March 16 and March 19) IndusInd Bank (down 33 per cent), ICICI Bank and Axis Bank (down 16 per cent), have left investors in a tizzy. HDFC Bank, which has been a resilient stock in the past, continues to drag the overall sector, falling nearly 6-7 per cent intra-day on Friday.

What gives?

With the Covid-19 threat increasing and impacting various sectors, the highly-leveraged banking sector is bound to witness sharp slowdown in growth and earnings in the coming quarters. What is additionally spooking the markets is the relatively higher exposure that some banks have to unsecured consumer loans. If the economic environment deteriorates sharply here on, the possibility of huge job losses can heighten the risk of defaults in unsecured consumer loans and SME loans.

Given that most private banks are retail-focussed and the growth in the past few years has been led by unsecured loans such as credit cards and personal loans, the Covid-19 breakout could set off large defaults in the coming months.

Also, with many private bank stocks trading at steep valuations (of 4-6 times price to book before the fall) when compared to their public sector peers (0.4-1 times price to book), the sell-off has been more intense in the past week’s market carnage.

Unsecured loans

In a recent analysis ( https://www.thehindubusinessline.com/money-and-banking/growth-of-credit-cards-personal-loans-trebles-in-5-years/article30644983.ece ) BusinessLine had highlighted the rising risk with banks’ unsecured loan portfolio that has grown at a scorching pace in the past four or five years. Both credit cards and personal loans have grown at about 30 per cent CAGR between FY15 and FY19. The latest data from the RBI suggest that credit cards and personal loans have continued to grow 32 per cent and 21 per cent, respectively, over the past year (January 2020 vs January 2019).

The outstanding loan amount for credit cards stands at ₹1.1-lakh crore as of January 2020, more than thrice the peak levels of 2008, after which unsecured loans had taken a beating. Personal loans are at about ₹7-lakh crore, more than six times the peak levels of 2008.

Private banks with a relatively greater focus on unsecured retail loans can witness some pain in the coming months. While for Axis Bank credit cards and personal loans constitute about 17 per cent of retail loans, for ICICI Bank it is about 15 per cent.

HDFC Bank con-call

For HDFC Bank, credit cards and personal loans constitute a higher 35 per cent of domestic retail portfolio. The bank’s credit card portfolio stood at about ₹57,000 crore as of December 2019.

A note put out by UBS post the con-call with HDFC Bank (on March 20), addresses some of the concerns. It states that “80 per cent of the bank’s unsecured loans are to salaried employees. This is majorly comprised of good and strong corporate and government employees. Repayments continue to remain healthy currently.”

The note states the management is currently tightening the underwriting standards. People have shifted to online spending and food delivery and online spending has increased. But in the case of a complete lockdown, management expects a decline in customer spending

The note also states that the bank’s SME portfolio is well diversified — geographically and industry wise — and 70-75 per cent of SME loans are secured. HDFC Bank has low exposure to airlines and limited exposure to the restaurants and hospitality business, according to the note.

Steep valuations

The sell-off in the market has led to sharp corrections in bluechip stocks (trading at expensive valuations) in the past week. Kotak Mahindra Bank, which was trading at about 7 times price to book in January, is now trading at about 5 times, after the stock’s 28 per cent fall. HDFC Bank, trading at 4.5 times price to book, is trading at about 3 times now, after its 30 per cent decline since January. IndusInd Bank, which fell by a sharp 70 per cent this year, has seen its valuations plummet to about 1 times price to book, from 3 times in the beginning of the year.

While a worsening economic slowdown is likely to impact the banking and finance sector significantly in the coming quarters, owing to slowdown in credit growth and increase in delinquencies, many of the private banks have strong capital bases to absorb loan losses. Further correction can open up good opportunities for long-term investors over the next month.

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