RBI’s review of digital platforms is in progress; valuations are reasonable; TP raised to Rs 1,860 from Rs 1,800; ‘Buy’ maintained
The largest private lender HDFC Bank has shown a 13.9% year-on-year (y-o-y) growth in the loan book.
In our discussions on payments & digital platforms, HDFC Bank management highlighted that (i) RBI’s review of digital systems is in progress & given limits on new credit cards, focus is on existing clients & debit-card users; (ii) platform for auto-ecosystem holds opportunity, (iii) digitisation of payments has reached only 5m of 55m merchants & the bank’s non-urban foray will focus here; & (iv) longevity of data & collection strength add to its edge in digital lending.
RBI’s digital platform review in progress: RBI is still reviewing HDFC Bank’s digital platforms and as per mgmt focus is not only on managing flow of transactions, but also on building a globally comparable platform. Also, recent reports of temporary overhang of its system is a bit concerning. We believe the complexity of payment systems has increased over the past 5 years and that requires much stronger back-end. Until restrictions are lifted, HDFC Bank is focussing on enhancing engagement with existing credit-card clients with new programmes and partnerships as well as focusing on debit-card users for pushing transactions.
Expansion in non-urban markets to help leverage digitising merchant payments: With just 5m out of 55m merchants in India accepting digital payments, the opportunity in digitising payments is large. HDFC Bank has a leadership position here with about 35-40% share and can leverage expansion into non-urban markets. Management highlighted that they are offering a gamut of financial products. These should help in gaining better wallet share of the clients and thereby improve profits.
Digital platform might need integration: HDFC Bank has launched multiple apps that cater to different segments and will launch a platform for auto-related loans/services. Even as HDFC Bank is taking proactive steps to design an ecosystem across key products, it might need to integrate independent mobile apps to improve customer experience.
Digital lending – longevity of data and collections add to bank’s strength: Management highlighted that the bank is well-placed to leverage on opportunity in digital retail loans. In fact, the bank’s two key strengths are quality of data and collection machinery. With a repository of data on retail lending/borrowers, the bank has been able to build analytical/predictive models that help in better client selection. At the same time, its existing collection network helps in better monitoring as well as recovery of loans—which is most important for new-to-bank clients and non-urban clients.
Maintain BUY: We see 20% profit CAGR over FY20-23 and ROE of 18% in FY22. Valuation at 3.5x adj P/B FY22e looks reasonable and we roll forward our price target to Rs 1,860 (from Rs 1,800) based on 3.8x Mar-23E adj. PB. We accordingly roll forward our ADR price target to $93 based on ADR/share & ADR-premium.