RBI has lifted one of two restrictions placed on HDFCB following computer system failures. It can issue new credit cards (restricted since December 20), which will be positive as it has lost shares of new customers. Limits on new digital platforms will remain, which could delay new launches of automatic lending / other digital 2.0 initiatives. Our channel checks with IT experts / managers indicate that HDFCB needs to strengthen backend oversight and recent capacity building is the right decision. TO BUY.
Releasing restrictions on new credit cards to help rebuild pipeline: HDFC Bank clarified that RBI allowed it to resume issuing new credit cards, lifting the restriction imposed on December 20, following the RBI review of the bank’s digital / computer systems for outages in recent years. This is positive for the bank as it has not been able to acquire new clients in the past 8 months, and although this has had a limited short term impact on profits, the lack of new clients from credit cards have a negative impact on earning potential. Since November 20, HDFCB’s credit card customer base has fallen 4%, while others have increased from 6% to 14%. HDFCB’s share of the number of cards and transaction value decreased from 200 to 300 basis points.
Restrictions on digital launches to stay; delays launch in a few segments: While RBI has eased the embargo on credit cards, restrictions on new digital initiatives will remain until further consideration. We believe this could delay the launch of new API-based platforms and some self-funding and other digital 2.0 initiatives.
Our channel checks indicate that the issues can be fixed: Our channel check with industry IT experts and leaders indicates that the key issue at HDFC Bank is with the back-end and data centers, partly in due to inadequate capacity and data choice. centers. HDFC Bank will need to increase investments in its IT capacity and recent plans to hire more than 4,000 people for IT platforms are a good move. In addition, the bank might need to improve the level of compartmentalization of IT systems, which can avoid capacity cross-blocking. We understand that these issues can be resolved and RBI may wish to obtain more comfort before lifting the current restrictions.
Scope to correct recent underperformance; maintain BUY: IT issues have been a topical issue in our conversations with investors and have been the cause of the stock’s underperformance since the start of the year: HDFCB up 8 %, Nifty Banks up 15% and ICICI Bank up 33%. With valuations at 3.5x the adjusted PB for the 22nd year, we think this valuation is attractive and are keeping our call option with a price target of Rs 1,900 on the basis of an adjusted PB of 3, 6x through June 23 and a target price for ADR at $ 93.