HDFC Bank share price rose 2 per cent on Monday after the Reserve Bank of India on Saturday lifted its embargo on new digital launches by the private lender. The banking regulator had barred HDFC Bank in December 2020 from issuing new credit cards and introducing new digital offerings under its ‘Digital 2.0’ programme because of several service outages. “HDFC Bank stock has underperformed the broader banking universe in the recent past and hence lifting of these restrictions addresses a key overhang,” said analysts at Motilal Oswal Financial Services. HDFC Bank share price rose over 2 per cent to touch an intraday high of Rs 1,433 apiece on the Bombay Stock Exchange.

The brokerage expects the lender to deliver a healthy business growth fueled by a pick-up in its retail (unsecured products) business and continued strength in commercial banking business. “We estimate HDFC Bank to report around 18% PAT CAGR over FY22-24. It continues to be our high conviction BUY,” said Motilal Oswal. With the RBI restrictions no longer in place, it expects buoyancy in retail loans driven by aggression of the bank to regain lost ground. This, in turn, will improve its loan growth, expand NIM marginally and result in higher PPoP growth.

Lifting of all digital restrictions to underpin overall performance

The RBI has lifted all restrictions imposed on HDFC Bank in two tranches. In August last year, the regulator lifted a temporary ban levied on sourcing of new credit cards. Now, the central bank has lifted all restrictions imposed under HDFC Bank’s Digital Banking 2.0 program. After removal of the ban on new credit cards sourcing, aggression was witnessed from the bank to regain its market share and lost momentum. Motilal Oswal analysts expect these efforts to gain further momentum as the lender intensifies its focus to market digital initiatives to its potential and existing customers.

The bank has witnessed a healthy pick-up in retail loans recently, which grew at an average of 5% QoQ over the past two quarters. With the new development, this should gain further traction in the coming quarters, according to analysts. “We expect retail growth to remain healthy fueled by continued recovery in unsecured products, home loans and LAP. We thus estimate HDFC B’s overall loans to clock ~18% CAGR over FY22-24,” said the brokerage.

Strong earnings outlook; valuations attractive at current level

According to analysts, HDFC Bank appears well positioned to deliver an improvement in PPoP growth at an average of 17% over FY22-24 after likely moderation in FY22. “This is propelled by a healthy pick-up in the Retail segment, while growth in Commercial and Rural Banking remains robust. We expect the margin trajectory to also recover gradually over FY23 while the uptick in retail loan growth and unsecured products would be supportive of fee income trends,” the brokerage said. Bank’s asset quality ratios have improved, though the restructured book stands comparatively higher at 1.4% of loans.

HDFC Bank stock rating
Target price: Rs 2,000, Upside: 43%

“Healthy provisioning coverage and a contingent provision buffer provide comfort on asset quality,” it added. Motilal Oswal estimates HDFC Bank to deliver around 18% PAT CAGR over FY22-24, with an RoA/RoE of 2.0%/17.5% in FY24, respectively. “HDFC Bank is currently trading at an attractive valuation of 2.5x FY24E P/ABV, which offers favorable risk-reward. We maintain our BUY rating on the stock with a TP of Rs 2,000,” it said.