HDFC Bank Share Price: After RBI ban on credit cards, more, here is what Edelweiss said

HDFC Bank Share Price: In a surprise move, the RBI has issued an order to HDFC Bank asking it to temporarily stop certain plans and even to fix accountability for the glitches that happened recently causing failed transactions and thereby hitting bank account holders:
(i) new business generation through digital banking (including its planned ‘Digital 2.0’)
(ii) sourcing of all new credit card customers. This stems from ‘outages’ of digital/mobile banking systems over the past two years (most recently on November 21st)

HDFC Bank has been asked to examine such lapses at the board level and strengthen IT infrastructure. Resumption of business as usual will be subject to satisfying RBI’s core concerns. Show of regulatory determination aside, we believe the disruption will be short lived and an opportunity to accelerate HDFC Bank’s tech investments. Competitive fallouts are temporary and franchise invariant. Maintain ‘BUY’ rating on HDFC bank with price target of Rs 1490.

Mile wide and inch deep:

While the current disruption in new digital business addition is immediate and ‘total’, it will, in our opinion, be short lived and breaks no new ground on HDFC Bank’s long-term competitiveness. It is obvious that the bank will have some elements of its digital backbone dependent on legacy IT systems. After all, one of the oft touted competitive advantages for fintech and new lenders has been zero legacy tech. The incident is, therefore, not a reflection on HDFC Bank new leadership, but wages of approaching middle-age for the franchise. Future digital strategy will attempt adding muscle to its delivery platform, not wholesale replacement of core. Near term market share losses, unlikely to be material to change its eventual standing as a franchise.

Opportunity cost better motivator than fines:

In regulatory regimes, across the world, fines have often been perceived as an easy way out for financial institutions. To that extent, a moratorium on new business acquisition until all the boxes are ticked in RBI’s check list demonstrates regulatory intent to effect intervention. It also puts HDFC Bank’s tech plan on a non-discretionary accelerated time frame. If HDFC Bank uses this opportunity to go ahead with all its near-term planned fixes and not just restrict itself to merely the regulator’s mandate, it could, on balance, gain from this incident.

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Outlook and valuation: Embodying resilience; maintain ‘BUY’

HDFC Bank has steadfastly denied the need for a capital raise since the early days of covid-19 and guided for a lower impact of the crisis than most managements, at every stage. Macro trajectory aside, it also remains a comment on the bank’s risk selection and capital productivity consciousness. Edelweiss continues to put a premium on resilience, which is what HDFC Bank offers, a strong balance sheet and likely higher residual capital than most. This higher residual capital ensures that its best in class franchise can support an adequately large balance sheet after this crisis and fulfil its earnings potential. In terms of gap between reported net worth and ‘true residual equity’, the bank is in the top quartile in our coverage universe. It continues to be among our top two sectoral picks. Edelweiss maintains a ‘BUY’ rating with target price of Rs 1490 on HDFC Bank.