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India's most valuable bank needs to dispel investor misgivings

HDFC Bank reported 13% growth in its retail portfolio, while wholesale loans grew by 6%. The growth may have been driven by credit cards  (Photo: Mint)Premium
HDFC Bank reported 13% growth in its retail portfolio, while wholesale loans grew by 6%. The growth may have been driven by credit cards  (Photo: Mint)

  • HDFC Bank’s digital processes came under fire a year ago, leading to a ban on fresh launches and even on credit card issuance.
  • The bank has issued a record 400,000 credit cards after a ban imposed by RBI was lifted in Aug

HDFC Bank Ltd’s pristine valuations have managed to stick so far despite the trouble the lender has found itself in over the past one year.

The lender’s digital processes came under fire a year ago, leading to a ban on fresh launches and even on credit card issuance. The ban on card issuance was lifted by the Reserve Bank of India in August this year.

A whistle-blower recently indicated that the bank charged processing fee from customers who had submitted forged documents, instead of reporting the forgery. All this has meant that investors have become more guarded towards the bank and no longer take its performance for granted.

Changing course
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Changing course

Shares have risen more than 10% since January, but that pales against the 26% rise in the broad Nifty and a similar gain in peers such as ICICI Bank. Peers have begun to close the valuation gap rather quickly.

Interestingly, shares of State Bank of India (SBI) have galloped 65% in the same period, which may also be because of modest valuations.

“The stock has underperformed by its own standards as well as peers because of the cumulative effect of the management change, allegations around misconduct in the auto business, covid-induced growth/asset quality disruption and the embargo on the card business by the Reserve Bank of India," analysts at Emkay Global Financial Services Ltd wrote in a note.

“The management will have to swiftly and effectively deal with the recent allegations of its leniency (including charging fees) in a case of documentation forgery, as such news flow will keep hurting its reputation and premium valuations," they said.

HDFC Bank ’s growth indicators for the September quarter suggest that the bank has managed a quick revival following the easing of the second wave of the coronavirus pandemic. The faster growth in retail loans compared with the corporate loan book shows that the bank is going back to its tested formula of focusing on retail.

HDFC Bank reported 13% growth in its retail portfolio, while wholesale loans grew by 6%. The growth may have been driven by credit cards.

A regulatory ban on issuing fresh credit cards since December 2020 had weighed on the bank’s retail loan expansion. The bank has issued a record 400,000 credit cards since the ban was lifted in August. The share of credit card outstanding in the overall retail loan books is roughly 6%.

The bank’s retail loan growth had slumped in FY21 in the wake of the coronavirus outbreak. At that time, wholesale loans came to the rescue by growing sharply by an average of 28% in the four quarters of FY21.

Indeed, the loan book mix tilted towards corporate loans and away from retail. In contrast, peers such as ICICI Bank, Axis Bank and even the largest lender, SBI, reported slower corporate loan growth during the year.

Asset quality is another factor that has buttressed HDFC Bank’s valuations. This is something that investors would keep an eye on, especially since the bank had reported an increase in its gross bad loan ratio for the June quarter. That said, compared with peers, the bank’s asset quality is still superior.

Even as its performance continues to be robust as compared to its peers, HDFC Bank’s real test will be how the lender manages to handle the misgivings surrounding some of its processes of late.

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