HDFC Bank share price: Business Improving; Tech Issue Non-Disruptive

Jefferies see healthy growth in earnings for HDFC Bank and maintain their Buy rating on the share with price target of Rs 1620 / share. HDFC Bank is working to resolve RBI's concerns/ restrictions, still these shouldn't disrupt business/ earnings. Encouragingly, most HDFC Bank retail business lines including unsecured loans have been opened-up, which is positive for growth & margins; deposit inflows stay strong. Asset quality is stabilising, but HDFC Bank may continue making provisions if earnings permit.

Need to resolve RBI's restrictions, but impact on business should be limited:

Management highlighted that the 3 system outages suffered by HDFC Bank in the recent past (Nov-18, Dec-19 and Nov-20) were disparate events suffered in mobile banking, net banking and power-outage/ back-up at data centres, respectively.
As a result, RBI has imposed curbs on
a) sourcing of new credit card customers
b) new launches under Bank's 'Digital 2.0' program

HDFC Bank management reiterated that the impact on business should be limited as these relate to incremental clients and roll-outs. The resolution of this will take some time that will include few weeks for strengthening disaster recovery system followed by review by RBI, bank's internal committee and independent-expert and any ensuing action, which in Jefferies view can take a few months

Most retail business lines back to pre-Covid:

HDFC Bank management indicated that there has been a healthy pick-up in disbursements across retail loan verticals and this has sustained in Oct-Nov 2020. Bank is back to pre-covid level of credit evaluation across products. While disbursements momentum has normalised, it will take time to reflect on loan growth, as origination was impacted during lockdowns. Retail loan growth was soft at 5% YoY in 2QFY21 and a pick-up here will also be accretive to margins.

Ecosystem banking:

Another key focus area for the HDFC Bank will be the creation of trade ecosystems for select sectors. It is working on such integrated platform solutions for a) healthcare b) auto c) Retail and d) Semi-urban and rural markets. Its partnerships with CSCs and rollout of Virtual Relationship Managers (VRM) have been successful.

Confident on asset quality; surplus-provisions go beyond Covid:

Management highlighted that asset quality continues to be strong and credit-costs should be within manageable limits. HDFC Bank is carrying surplus provisions (0.6% of loans) and as per management the surplus provisions go beyond Covid linked provisions. Hence if earnings can accommodate such provisions, banks will enhance buffers.