Continuance of curbs on digital platforms to delay launches; valuation is attractive; ‘Buy’ retained with target price of Rs 1,900
RBI has lifted one of the two restrictions on HDFCB that followed IT system outages. It can issue new credit cards (restricted since Dec 20), which will be positive, as it had lost share in new clients. Limits on new digital platforms will stay, which may delay new launches for auto-loans/other Digital 2.0 initiatives. Our channel checks with experts/IT heads indicate HDFCB needs to strengthen backend monitoring & recent capacity-building is the right move. BUY.
Release of restrictions on new credit cards to help rebuild pipeline: HDFC Bank clarified that RBI has allowed it to resume issuing new credit cards, lifting the restriction that was imposed in Dec-20, following RBI’s review of the bank’s digital/IT systems for outages in recent years. This is positive for the bank as it has not been able to acquire new customers for the past 8 months, and while this has had limited near-term impact on earnings, lack of new credit card clients has a tail-impact on revenue potential. Since Nov-20, HDFCB’s credit card customer base is down 4%, while others have grown between 6% and 14%. HDFCB’s share in number of cards and value of transactions has declined by 200-300bps.
Restrictions on digital launches to stay; delays launch in few segments: While RBI has relaxed embargo on credit cards, restrictions on new digital initiatives will stay until further review. We believe this may delay launch of new API-based platforms and some initiatives in auto-financing and other Digital 2.0 initiatives.
Our channel checks indicate problems can be resolved: Our channel check with experts and IT heads in the sector indicate that the key issue at HDFC Bank has been at the back-end and data-centres, partly due to inadequate capacity and choice of data-centres. HDFC Bank will need to enhance investment in its IT capacities and recent plans to hire over 4,000 staff for IT platforms is a good move. Also, the bank might need to enhance the level of compartmentalisation of IT systems, which can avoid cross-blocking of capacity. We understand that these issues can be resolved and RBI might like to get greater comfort before lifting current restrictions.
Scope to correct recent under-performance; maintain BUY: The IT-related issues have been topical across our investor conversations and have been a reason for the stock’s under-performance YTD—HDFCB up 8%, Nifty Banks up 15% and ICICI Bank up 33%. With valuations at 3.5x FY22e adjusted PB, we think this valuation is attractive and retain our Buy call with a price target of Rs 1,900 based on 3.6x Jun-23e adjusted PB and price target for ADR at $93.