HDFC Bk: Analysts eye new launches as RBI lifts curb on digital initiatives

With the Reserve Bank of India (RBI) lifting restrictions put on HDFC Bank's new digital initiatives, analysts eye new initiatives by the bank to drive growth. The move, they say, would help HDFC Bank push the launch of new platforms such as Payments-Hub, Customer-Experience Hub, Neo-bank vertical and ecosystem platforms.

According to a note by Jefferies, the lifting of restrictions will help the bank push the above-mentioned key digital initiatives over the next 6-12 months. The lifting of the ban would also allow the bank to smoothen business-as-usual (BAU) initiatives, instead of having to seek clarity from RBI in case of doubts, it said.

Those at Antique Stock Broking said the lifting of the restriction provides better clarity to the bank to aggressively pursue and communicate both short-term and long term digital journey imagined under digital 2.0.

"The bank will be able to improve user interface, create customer experience and payment hubs through Payzapp and Smartbuy, and develop a holistic ecosystem with various channel partners/fintech for better customer engagement and experience. Besides, enterprise factory and digital factory progress would increase competency and efficiencies of the bank and aid in creating a neo-bank within the bank. While this entails investments and, in the near-term, cost to income ratio may go up (management indicates 200-300bps rise is a possibility), over the medium-term productivity gains will once again bring it lower to mid-thirties. We believe this is a positive development and execution/communication on improving customer experience/offerings from a franchise, and still rapidly growing could help to improve the outlook," the brokerage said.

In December 2020, RBI had imposed restrictions on HDFC Bank on issuing new credit cards, and introducing new digital initiatives due to concerns over recurring IT-system outages.

While the restriction on issuance of credit cards was lifted in August 2021, helping the bank regain share (9 per cent rise in outstanding cards relative to 4 per cent decline over the period of limitation), the second restriction has been lifted now.

Reacting to the development, the stock of the private lender rose 3.2 per cent to Rs 1,4342 per share on Monday as against a 1.7 per cent gain in the benchmark S&P BSE Sensex.

HDFC Bank's operating performance witnessed deterioration post-implementation of the RBI curbs. Retail loan growth moderated to 7 per cent in FY21 compared with 15 per cent in FY20. A stronger performance in wholesale business, however, offset the impact on overall loan growth. HDFC Bank delivered 14 per cent growth in overall loans in FY21 relative to 21 per cent in FY20. During the embargo period, its net interest margin (NIM) reported a decline of 20bp to 4.1 per cent. Hence, growth in pre-provision operating profit (PPoP) declined to 18 per cent in FY21 from 23 per cent in FY20.

"However, with the restrictions no longer in place, we expect buoyancy in retail loans driven by aggression of the bank to regain lost ground. This, in turn, will improve its loan growth, expand NIM marginally and result in higher PPoP growth," said Motilal Oswal Financial Services.

That said, while analysts expect the bank's underperformance to reverse as a key overhang has been addressed, the stock may not touch its previous valuation peak as alternatives have emerged.

According to Kotak Institutional Equities, the lack of NIM improvement, slow growth in fee income, contingent provisions created despite firm evidence in economic recovery is analysed with high intensity. Any disappointments on a few of these ratios, especially at a time when its competitors have done relatively better, are probably getting scrutinized more than desired, it said.

Overall, the lender's strong pick up in loan book, robust asset quality, and undemanding valuation post recent correction makes it an attractive buy at current levels, analysts say.

"HDFC Bank has underperformed the broader banking universe in the recent past (down 7 per cent in the past year vs 11 per cent rally in Sensex) and hence lifting of these restrictions addresses a key overhang. Further, we expect the bank to deliver a healthy business growth fueled by a pick-up in its retail (unsecured products) business and continued strength in commercial banking business. We estimate the bank to report 18 per cent net profit CAGR over FY22-24, with an return on asset (RoA)/ return on equity (RoE) of 2 per cent/17.5 per cent in FY24, respectively. The stock has undergone a significant correction  and is trading at 2.5x FY24E ABV (~2SD below its 10- year average valuations)," said Motilal Oswal Financial Services. The brokerage maintains a 'Buy' rating on the stock with a target price of Rs 2,000.

KIE, meanwhile, has upgraded HDFC Bank to 'BUY' from 'ADD' noting that the recent underperformance is not backed by any material deterioration in fundamentals in its business, despite challenges that are emerging in the macro led by extraneous factors such as crude or inflation.

"We retain our fair value at Rs 1,740 valuing the bank at 3.2X book and 22X FY2024 EPS for RoEs at 15-16 per cent levels and steady earnings growth. The decline in multiples can be attributed to various reasons but we are less confident that it would return to peak levels in the medium-term. Unlike the past decade, the ability to differentiate on growth and return ratios is likely to be challenging which implies that the premium multiples that it had enjoyed are always likely to be tested by its peers," it added.