RBI is still reviewing HDFC Bank's digital platforms and as per management, the focus is not only on managing flow of transactions, but also on building a globally comparable platform. Also, recent reports of temporary overhang of its system is a bit concerning. Jefferies believes that the complexity of payment systems has increased over the past 5 yrs as this combines a multitude of analytical platforms that require much stronger back-end.

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Until restrictions are lifted, HDFC Bank is focussing on enhancing engagement with existing credit-card clients with new programmes and partnerships as well as focusing on debit-card users for pushing transactions. HDFC Bank share price today is Rs 1477, down Rs 20 or 1.3%.

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Expansion in non-urban markets to help leverage digitising merchant payments:

With just 5m out of 55m merchants in India accepting digital payments, the opportunity in digitising payments is large. HDFC Bank has a leadership position here with about 35-40% share and can leverage expansion into non-urban markets to capitalise opportunity. HDFC Bank Management highlighted that they are taking a gamut of financial products along including current accounts/ loans/ transaction banking (tax, forex etc.) for the business and savings & wealth mgt. plans for proprietors and family. These should help in gaining better wallet share of the clients and thereby improve profits.

Digital platform might need integration:

HDFC Bank has launched multiple apps that cater to different segments such as Payzappp for payments/ shopping and Smartbuy for channeling ecommerce traffic, and will launch a platform for auto related loans/services. Even as HDFC Bank is taking proactive steps to design an ecosystem across key products, it might need to integrate independent mobile apps to improve customer experience.

Digital lending - longevity of data and collections add to bank's strength:

HDFC Bank Management highlighted that the bank is well-placed to leverage on opportunity in digital retail loans. In fact, the bank's two key strengths are quality of data and collection machinery. With a repository of data on retail lending/ borrowers, the bank has been able to build analytical/ predictive models that help in better client selection. At the same time, its existing collection network helps in better monitoring as well recovering loans - which is most important for new-to-bank clients and nonurban clients.

Jefferies see 20% profit CAGR over FY20-23 and ROE of 18% in FY22. Valuation at 3.5x adj P/B FY22E looks reasonable and rolls forward their price target to Rs 1860 (from Rs 1800) based on 3.8x Mar-23E adjusted Price to Book. Jefferies accordingly rolled forward our ADR price target to US$93 based on ADR/share & ADR-premium.