For HDFC Bank, lifting embargo is only a sentiments booster 

After 3.25 per cent gains in the bourses on Monday reacting to regulatory relief that came through last Saturday, HDFC Stock saw a relatively muted opening on Tuesday’s trade.

With respite coming in after 15 months, lifting the regulatory embargo imposed on the bank’s digital offerings is certainly a sentiment booster. In December 2020, within weeks of Sashidhar Jagdishan taking over as HDFC Bank’s MD & CEO, RBI slapped a ban on the bank’s credit card issuances and introducing new products on its Digital 2.0 platform. While the embargo on cards was lifted in August last year, a complete relief came through on March 12.

Interestingly, while a majority of analysts have handed out positive commentary on expected lines with the ban being lifted, none have really tinkered with their target price estimates. This suggests that the Street isn’t factoring a major leg-up to revenues with the embargo on digital products now removed. Therefore, while the development is positive and is step in the right direction affirming confidence on the bank’s operations and processes, it may not materially improve the earnings outlook.

Even in the credit cards space, where SBI Cards and ICICI Bank aggressively captured market share from December 2020 to August 2021, recent reports suggest that even as HDFC Bank is back in action, its not able to reclaim its lost market share. The same could hold true even for digital products, where banks have aggressively increased their presence especially during the ‘Great Indian Online Sale’ of Flipkart and Amazon last year. Competition is high even from fintech lenders, including those in the buy now pay later segment and HDFC Bank may have missed the bus. Beyond lifting sentiments around the stock, Saturday’s development may not hold much importance to the bank’s financials. More importantly, can this reverse the underperformance of HDFC Bank stock?

To be sure, the stock (with a weight of over eight per cent in the Nifty50 index) has fallen by 7.5 per cent in a year as against Nifty50’s 12 per cent gains during this period. Much of the underperformance was pegged to the longer than estimated time taken for the ban to be lifted on the bank’s business.

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Initially the Street has pegged 3–6 months timeframe for the regulator to ease the embargoes. But it has taken longer and accordingly, the Street’s view on the stock changed. Earlier labelled as the technologically advanced bank, 2020’s ban has tested the assumption. Further, hit by the pandemic, the bank’s gross non-performing assets rose to over 1.3 per cent which has historically been it’s the comfort zone.

While the numbers are gradually inching back to FY20 levels, the combination of slowing loan growth, increasing NPAs (especially on the retail side) and RBI’s ban on select businesses have weighed on HDFC Bank’s stock price so far. The last issue is now sorted. But for a strong re-rating hereon, much will depend on how the bank’s loan book shapes up going ahead and whether the restructured book (1.4 per cent of total loans) has insulated it from further shocks.

To that extent, the upcoming March quarter results will be critical. Trading at 3.4x price-to-book 12-months trailing valuations, HDFC Bank’s asking rate has corrected significantly from the 4.2x peak seen in 2020.

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