Analysis | Under Sashidhar Jagdishan, HDFC Bank is fighting two enemies simultaneously

Sashidhar JagdishanThe first quarter numbers (April-June), of India's largest private lender show that COVID-19's resurgence has had a significant impact on their books. The slowdown in business growth is evident. The selection of loans for new retail assets is fraught with uncertainty.The Reserve Bank of India (RBI), however, has completed its audit of the banks IT infrastructure. This means that the bank is optimistic that it will soon be free to launch digital products. HDFC Bank has been going through difficult times since Aditya Puri, its former CEO, left the bank last year. Sashidhar Jagdishan is the new chief of HDFC Bank and he is trying to find a new path. Jagdishan still has many issues to address.The bank's performance during good times is clearly under pressure, and there is clear pressure on loan growth. On a year-on–year (YOY) basis, the loan growth has fallen to 14.4 percent. However, on a quarter–on–quarter (QoQ), it was only 1.3 percent.Retail loans saw a 9 percent increase over June 30, 2020 and a 1 percent decrease in March 31, 2021, respectively. Commercial and rural banking loans also grew by about 25 percent over June 30, 2021, and approximately 4 percent over March 31, 2020.Since the inception of COVID, HDFC Bank has taken a cautious approach just like its peers. This cautious approach continued in Q1. The second wave COVID was not an anticipated one for the banking industry, but banks had increased their provisioning cushion (money saved against possible losses), taking cues form the RBI's repeated warnings to protect against the COVID impact.Therefore, the damage is less than expected -- something that RBI Governor Shaktikanta das also stated in his opening remarks to the recent financial stability report.Moderation in credit momentumAnalysts acknowledge the loss in business momentum. We believe that HDFC Bank's credit momentum is now somewhat stable in Q1, due to continued weakness in its retail segment. Anand Dama, Emkay Global senior research analyst, stated that the bank has managed its assets well after the second COVID wave. However, new stress formation in CV and SME due to back-toback disruptions will be a key monitoring point.Dama stated that the bank has a reasonable buffer of Rs 68 billion (0.6 percent of loans) to protect credit costs.Going forward, the bank will need to consider COVID-19's trajectory in order to determine its loan growth rate. As the bank's ability to borrow and repay existing loans, as well as that of new borrowers seeking new loans, will depend on the progress of the vaccination drive, the entire banking sector will need to monitor it closely.Questions about technology platformHowever, COVID is just one problem for HDFC Bank. Despite numerous assurances from the bank that they have addressed the problems, the problems with the bank's IT infrastructure continue. Even recently, the bank reported a mobile banking interruption.Questions remain about the technology platform's ability to handle large numbers of digital transactions and launch of new products. The bank has completed its third-party audit by the RBI. Jagdishan's new team is still waiting for clearance from the central banking. At the moment, the RBI is reviewing the audit report. The regulator's perspective will be key.In December 2020, the RBI barred HDFC Bank's digital launches and stopped it issuing credit cards. This was after multiple outages to their digital channels. We continue to have discussions with the RBI. They indicated the areas they wanted us to change in terms of technology investments and processes. In a recent conversation with the media, Parag Rao (Group HeadPayments Consumer Finance, Digital Banking & IT at HDFC Bank), stated that we had been going through this in a very interactive way over the past six months.According to the bank, its market share has been affected by the RBI ban. Although the ban has caused a slight drop in market share, the bank's IT chief stated that the company had taken internal actions to ensure it maintains its market share through spends.Summarising, the country's largest private bank is currently fighting two battles simultaneously under the new Jagdishan-led team. These are the COVID impact as well as its internal technology issues. We will find out how successful it is in the coming quarters.