Home >Markets >Mark To Market >Why digital outages don’t seem to affect HDFC Bank’s valuations much

MUMBAI: Customers of HDFC Bank complained about troubles using the lender's digital interfaces yet again on Tuesday, but its share price ended more than 3% higher. To be sure, shares have slipped about 2% in early deals today. The lender remains the most valued bank in India despite a series of problems involving its digital interfaces since last four months.

In fact, HDFC Bank was pulled up by the regulator for such slips and is barred from launching any new digital campaigns or even issuing credit cards to new customers until it fixes these bugs. Despite all this, the stock has gained a decent 8% since the December, when the digital troubles surfaced.

Helping HDFC Bank’s valuation are its robust asset quality and a steady operating profit growth. The lender’s gross bad loan ratio has remained below 2% even in the worst of times when delinquencies surged across banks. In the aftermath of the pandemic, HDFC Bank’s asset quality was stable notwithstanding troubles in its retail loan book. Given this strong streak, provisioning needs have stayed modest and helped the lender keep an average growth rate of 20% in operating profit for the past five years. Its peers have reported higher delinquency rates and a hit on operating metrics. So long as the lender delivers on these metrics and a superior return on asset and return on equity, analysts believe its premium valuation will stick.

The management’s outlook has also been sanguine. According to Jefferies India Pvt Ltd, the bank expects to increase its share in the loan market to 15% from the current 10% over the next 5-7 years. Most analysts including those at Jefferies have a buy rating on the stock.

But the brokerage firm also highlighted HDFC Bank’s troubles regarding customer complaints and employee engagement. The lender saw an attrition level of 16% in FY20. The latest digital slips have shown an increase in customer complaints. To be sure, in FY20 the bank had reported a reduction in customer complaints.

Analysts also point to the counterfactual on valuation when it comes to the lender’s digital issues. In the absence of these, the lender’s shares would have seen sharper gains, according to them. What’s more is that shares of rivals ICICI Bank and Axis Bank have galloped during the same period.

The upshot is that HDFC Bank’s shareholders have no reason to complain even though they might be irked if they are a customer. But regular and prolonged snags are sure to bother shareholders at a time when digital prowess is a big growth enabler.

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