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RBI lifts restrictions on HDFC Bank’s digital launches

Expect further traction in retail growth; PPoP growth to recover over FY23

In a welcome move, the RBI further lifted all restrictions imposed on HDFC Bank (HDFCB)’s Digital 2.0 program. This addresses a key overhang on the stock as HDFCB was losing ground on digital initiatives v/s competition

Earlier during Aug’21, the RBI lifted the ban laid on sourcing of new credit cards. To regain the lost momentum and make up for ~nine months of ban, HDFCB has since stepped on the gas to acquire new credit card customers and originated 1.3m new credit cards (net). With this, it has 16m cards outstanding

HDFCB has exhibited a healthy revival in retail loan growth propelled by a pick-up in unsecured segments while the commercial banking segment has also witnessed strong traction. With RBI restrictions not being a hindrance anymore, we expect further aggression from the bank that will help drive faster growth in retail assets and thus support growth in NIMs/PPoP

Valuation and view: HDFCB has underperformed the broader banking universe in the recent past 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 HDFCB to report ~18% PAT CAGR over FY22-24, with an RoA/ RoE of 2.0%/17.5% in FY24E, respectively. The stock has undergone a significant correction and is trading at 2.5x FY24E ABV (~2SD below its 10- year average valuations). HDFCB continues to be our high conviction BUY as highlighted in our latest “report” published on 8 th Mar’22. We retain our TP of INR2,000 (premised on 3.4x FY24E ABV + INR127 from subs).

A quick recap of the RBI’s restrictions levied last year on HDFCB

Through an order issued in Dec’20, RBI temporarily banned all digital launches of HDFCB planned under the Digital 2.0 program, including sourcing of new credit cards. This action was prompted by multiple incidents of outages in HDFCB’s net banking/payment facilities over the past few years. The regulator also appointed an external firm in Feb’21 to conduct a third-party digital audit. After the audit was completed, a final report was submitted to the RBI for review

Operating performance suffered after the digital curbs were imposed

HDFC Bank’s operating performance witnessed deterioration post-implementation of the RBI curbs. Retail loan growth moderated to 7% in FY21 v/s 15% in FY20. A stronger performance in wholesale business, however, offset the impact on overall loan growth. HDFCB delivered 14% growth in overall loans in FY21 v/s 21% in FY20. During the embargo period, its NIM reported a decline of 20bp to 4.1%. Hence, growth in PPoP declined to 18% in FY21 from 23% 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.

Lifting of all digital restrictions to underpin overall performance

The RBI has lifted all restrictions imposed on HDFCB in two tranches. In Aug’21, the regulator lifted a temporary ban levied on sourcing of new credit cards. The RBI has now lifted restrictions imposed under HDFCB’s Digital Banking 2.0 program. After removal of the ban on new credit cards sourcing, we have seen aggression from the bank to regain its market share and lost momentum. We now expect these efforts to gain further momentum as HDFCB intensifies its focus to market digital initiatives to its potential and existing customers. The bank has witnessed a healthy pick-up in retail loans recently, which grew at an average of 5% QoQ over the past two quarters. With the new development, this should gain further traction in the coming quarters. We expect retail growth to remain healthy fueled by continued recovery in unsecured products, home loans and LAP. We thus estimate HDFCB’s overall loans to clock ~18% CAGR over FY22-24.

Strong earnings outlook; valuations remain attractive at current level

HDFCB appears well positioned to deliver an improvement in PPoP growth at an average of 17% over FY22-24E after likely moderation in FY22E. This is propelled by a healthy pick-up in the Retail segment, while growth in Commercial and Rural Banking remains robust. We expect the margin trajectory to also recover gradually over FY23 while the uptick in retail loan growth and unsecured products would be supportive of fee income trends. Asset quality ratios have improved, though the restructured book stands comparatively higher at 1.4% of loans. Healthy provisioning coverage and a contingent provision buffer provide comfort on asset quality. We estimate HDFCB to deliver ~18% PAT CAGR over FY22-24, with an RoA/RoE of 2.0%/17.5% in FY24, respectively. HDFCB is currently trading at an attractive valuation of 2.5x FY24E P/ABV, which offers favorable risk-reward. We maintain our BUY rating on the stock with a TP of INR2,000 (premised on 3.4x FY24E ABV + INR127 from subs).

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