
A key overhang lifted for HDFC Bank stock

Summary
- With RBI curbs off, HDFC Bank’s NIM expansion may be led by efforts to regain market share
- The bank can integrate offerings in digital ecosystems via partnerships with vendors
BENGALURU/MUMBAI : HDFC Bank Ltd’s shares rose about 3% on Monday, outpacing the benchmark Nifty50 index’s 1.5% gain. The Reserve Bank of India (RBI) has lifted restrictions on the bank’s Digital 2.0 programme, boosting investors’ confidence. This comes after the bank’s shares hit a new 52-week low last week.
The announcement has removed a major stock-specific overhang even as macro headwinds are at play, pointed out analysts from Jefferies India Pvt. Ltd. “This would help push the launch of new platforms such as payments-hub, customer-experience hub, neo-bank vertical and ecosystem platforms," Jefferies’ analysts said in a 12 March report. “The lifting of the ban would also allow the bank to smoothen business-as-usual initiatives, instead of having to seek clarity from RBI in case of doubt."

Note that the HDFC Bank stock has underperformed its peers for some time now. In the past year, the shares have declined by 7% vis-à-vis a 0.5% fall in the Nifty Bank index.
The RBI curbs have been a worry for investors. In December 2020, the regulator imposed restrictions on HDFC Bank issuing new credit cards and introducing new digital initiatives owing to frequent IT system outages.
To be sure, it would be foolhardy to expect an immediate, meaningful impact on earnings post the lifting of the ban. “We are not changing our loan growth or earnings assumption, but we do believe that the ability to compete in the market has significantly improved post this development," said analysts at Kotak Institutional Equities in a report on 14 March.
The embargo on the issuance of credit cards was lifted in August. While this was helpful, the bank has not regained the market share it enjoyed prior to the ban. For instance, in January 2022, HDFC Bank’s market share in credit card outstanding and spending stood at 22.8% and 24.8%, respectively. The same parameters in November 2020 (before the embargo) stood at 25.6% and 30.7%, respectively. Growth was expected to be stronger, however. Even so, it is encouraging that credit card outstanding in January 2022 has seen 4% growth compared to pre-embargo levels.
“It is important to note that since the lifting of the ban on credit cards, the bank has been able to stem the decline and improvement, if any, is likely to be gradual as competition has significantly increased in recent quarters," Kotak’s analysts said.
With the RBI curbs lifted, an expansion in HDFC Bank’s net interest margin (NIM) could be seen led by increased efforts of the bank to regain market share. Further, the bank can integrate offerings in digital ecosystems through partnerships with vendors in different sectors.
Indeed, the bank’s NIM has been under pressure lately. In the December quarter (Q3FY22), NIM at 4.1% remained unchanged sequentially and this has been a sore point for investors. Further, asset quality pressure from an unsecured retail portfolio and a weak core pre-provision operating profit trend are key downside risks, note Jefferies’ analysts.
The bright spot, however, is that valuations are inexpensive. In the medium term, analysts at Kotak are not hopeful of a rebound in valuations to peak levels seen earlier with the rise in competitive intensity, although they have retained their fair value for the stock at ₹1,740, valuing the bank at 3.2 times book. Note that the recent geopolitical tensions do create macroeconomic uncertainties. Accordingly, investors would do well to follow if there is a deeper impact on the bank’s operations specifically.