A major overhang lifted for HDFC Bank stock

Analysts at Jefferies India Pvt Ltd pointed out that the announcement has removed a major stock-specific overhang, even as macro headwinds are underway. “This will help drive the launch of new platforms such as payments-hubs, customer-experience hubs, neo-bank verticals and ecosystem platforms,” ​​analysts at Jefferies said in a March 12 report. Instead of seeking clarity from RBI in case of doubts, allow the bank to carry on with the business as usual.”

Note that the stock of HDFC Bank has underperformed its peers for some time now. Shares have lost 7% in the past one year compared to a 0.5% fall in the Nifty Bank index.

RBI’s restrictions have been a matter of concern for investors. In December 2020, the regulator banned HDFC Bank from issuing new credit cards and launching new digital initiatives due to frequent IT system outages.

To be sure, it would be foolish to expect an immediate, meaningful impact on earnings once the ban is lifted. Analysts at Kotak Institutional Equities said in a report on March 14, “We are not changing our credit growth or earnings sentiment, but we believe this development has significantly improved our ability to compete in the market. “

The ban on issuance of credit cards was lifted in August. While this was helpful, the bank did not get back the market share it had acquired before the ban. For example, in January 2022, HDFC Bank’s market share in credit card dues and spends was 22.8% and 24.8%, respectively. The same parameters were 25.6% and 30.7% respectively in November 2020 (before the ban). However, growth was expected to be strong. Nevertheless, it is encouraging that credit cards outstanding in January 2022 have seen a growth of 4% as compared to pre-ban levels.

Analysts at Kotak said, “It is important to note that since the lifting of the credit card ban, the bank has been able to arrest the decline and the recovery, if any, is likely to be gradual as competition has increased in recent quarters. There has been a substantial increase.” ,

With the lifting of RBI restrictions, the expansion in HDFC Bank’s net interest margin (NIM) can be seen due to the bank’s increasing efforts to gain market share. In addition, the bank can integrate offerings into the digital ecosystem through partnerships with vendors across different regions.

Actually, the NIM of the bank has been under pressure these days. In the December quarter (Q3FY22), NIM remained unchanged sequentially at 4.1% and this has been a sore point for investors. In addition, asset quality pressures from an unsecured retail portfolio and a weak core pre-provision operating profit trend are major downside risks, note analysts at Jefferies.

However, the good thing is that the appraisal is cheap. In the medium term, Kotak analysts do not expect a rebound in valuations to higher levels seen earlier with an increase in competitive intensity, although they have maintained their fair value for the stock. Bank’s valuation at 1,740, 3.2 times Book. Note that recent geopolitical tensions create macroeconomic uncertainties. Accordingly, investors would do well to follow if there is a particularly profound impact on the bank’s operations.