HDFC Bank runs the risk of being an underperformer in the short term: Prashasta Seth, IIFL AMC

In a chat with ET Now, Prashasta Seth, CEO at IIFL AMC shares his views on HDFC Bank. Excerpts:

ET Now: HDFC Bank numbers were not very impressive and HDFC is no longer among the outperforming markets. Do you think HDFC Bank, in the short term, runs the risk of being an underperformer?

Prashasta Seth: Yes, I would think so, given the kind of numbers that we have seen. Logically speaking, I expected the stock to fall after the numbers, but given the fact that liquidity in the last few days is what has been driving the markets, we have seen a positive move in the stock. The valuation gap between HDFC and any other banks continue to be extremely large, so unless you have visibility in terms of higher growth, that kind of gap should come into question. If you think about it, HDFC has underperformed year to date also, say on Axis or ICICI by significant margins.

ET Now: That is because of the FII limit. That is a technical overhang, don't you think?

Prashasta Seth: That has played out for Axis also, but if you see the banking sector, the big problem in this space is that you are seeing a decline in the non-interest income. Thus, the fee income has been substantially coming off and that is a trend that you have seen across all banks. If that happens, that will have more than a proportionate impact on your ROEs.

A name like an HDFC Bank is not cheap and they have never been cheap, but the reason it continues to trade is because of a certainty of earnings and a decent ROE. If that comes into question, you could see some amount of derating happening in the stock. Whether it is a quarter trend or a two quarter trend or a structural trend is what we will have to wait and see. If it is something that is structural, that might lead to a derating in the stock, but if it is not structural, you will have one or two quarters of overhang on the stock.