Lifting of credit card ban may spark up to 32% rally in HDFC Bank: Analysts

The Reserve Bank of India’s (RBI’s) nod to lift ban on issue of new credit cards may trigger an up to 32 per cent rally in the lender’s stock, believe analysts, as the lift has come ahead of festive season, presenting an opportunity to capture market share.

The scrip surged 3 per cent at Rs 1,564.75 on the BSE in intra-day trade on Wednesday and was among the top gainers on the BSE barometer. In comparison, the S&P BSE Sensex was up 0.5 per cent at 10:30 AM.

Analysts at Macquarie, for instance, opine that the lender will be able to re-gain its lost market share of 180 bps or even more, as there is a large customer base to which it can cross sell.

“The RBI has lifted the ban ahead of the festive season, starting September, and we may see the bank rolling out attractive credit card schemes with full force,” they said in a report.

The ban on card issuance hit HDFC Bank hard as its card base fell from 15.38 million in December to 14.82 million in June.

While it is, by far, the largest credit card issuer in the country and remains so even after the ban, the ban resulted in the lender losing market share in a rapidly growing arena. On the flipside, ICICI Bank, SBI Cards and, Axis Bank almost added 1.3 million, 0.75 million, and 0.3 million new cards over the similar period.

This translates into market share gains of 49 per cent and 28 per cent for ICICI Bank and SBI Cards, respectively, during this period.

Financially, the lifting of the ban will protect HDFC Bank's overall profitability as credit card segment is the key earnings driver, says Motilal Oswal Financial Services.

“During recent quarters the bank has reported moderation in fee income/net interest income, affected by RBI’s restriction on credit cards sourcing as this segment contributes roughly 25-33 per cent of the total fee income for the bank,” they said.

However, a school of thought points out that the partial lifting of the ban is only “partially positive” as the RBI’s “reluctance to give a complete waiver is a negative”.

“Additional nod may be linked to milestones achieved and may delay full normalcy in new digital initiatives,” say analysts at JPMorgan.

HDFC Bank, they say, will have to materially raise technology spends to charge ahead.

Given this, Siddharth Purohit, equity analyst at SMC Global says that the up move in the stock may be slow relative to peers.

“That said, this has removed a big hangover and will be appreciated by investors. While the move will be slow and will happen gradually, investors can start buying the stock now,” he says.

In the past three months, the stock of HDFC Bank has underperformed the market by gaining 7.5 per cent, as compared to a 13 per cent rally in the S&P BSE Sensex. Further, in the six months, the stock was down 2.5 per cent, against an 8.4 per cent gain in the benchmark index. It hit a record high of Rs 1,650 on February 24, 2021.

Source: Brokerage reports
Note: Upside from Tuesday's closing price