HDFC Bank: Digital disruption, changing portfolio mix are the dampeners

Moody's says RBI halting the bank's Digital 2.0 initiative and sourcing new credit cards is credit negative

The HDFC Bank stock has corrected over 4 per cent since last Thursday when the regulator asked the bank to stop launches under its Digital 2.0 initiative and sourcing new credit cards. At Rs 1,372.25 apiece, its share price has fallen 7 per cent from its 52-week high it hit nearly 10 days ago. 

For a bank that sources nearly 95 per cent of its retail transactions digitally, analysts at Moody’s termed last week’s development as credit negative. “The RBI action will delay the launch of HDFC Bank's Digital 2.0 initiative, under which the bank aims to consolidate all customers’ digital transactions… This has the potential to increase spending to improve the bank's digital infrastructure, which would strain its profitability,” analysts at Moody’s noted. 

Digital 2.0 was touted to be a platform to harmonise and consolidate various digital transactions, such as utility payments, savings, investments, shopping, trade, insurance, and advisory services. HDFC Bank also planned to roll out digital auto loans under this initiative, thus moving the origination of two- and four-wheeler loans to the digital platform. Considering that these loans account for about 25 per cent of its retail portfolio, a delayed launch could impact growth. 

Suresh Ganapathy of Macquarie Capital said with HDFC Bank growing thrice the rate of the industry, its technology might not have kept pace. Analysts at Motilal Oswal Financial Services said the timeline of lifting these orders would be a key monitorable and they would be watchful on future developments. 

For now, the Street estimates that it can take 3–6 months for the bank to restart these products; translating into one-two quarters of earnings disruption. Brakes are being put on its retail segment, just when its share has dipped to 44 per cent to total loans — a 10-year low for HDFC Bank. On the other hand, the contribution of unsecured loans (over 20 per cent of retail loans) — personal loans and credit cards — at 28 per cent of overall revenues, is at its peak. With slippages increasing every quarter, any derailment on growth or change in customers’ repayment behaviour after moratorium may impact the overall asset quality. 

The rising share of the corporate book may also result in a compressed net interest margin. Analysts expect a further 20–50 basis points profitability contraction, from Q2’s 4.1 per cent (down 20 bps YoY).

Analysts at Kotak Institutional Equities noted that as the loan book shifts towards a less aggressive portfolio (mostly state-owned entities), margin contraction may be inevitable. 

With a class-action suit in the US ongoing and pressure building on loan growth and profitability, sustaining the past momentum can be challenging. Correction, though, presents attractive buying opportunities, given the bank’s sustained leadership position.