How HDFC Financial institution’s Litany Of Crises Has Spelt Alternative For ICICI Financial institution

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How HDFC Bank's litany of crises has spelt opportunity for ICICI Bank

When Sashidhar Jagdishan, the managing director and CEO of HDFC Financial institution, publicly and upfront apologised to shareholders of their built-in annual FY21 report launched in June—about points referring to expertise outages the financial institution had been dealing with and a ban imposed on it to problem new bank cards—the transfer was uncommon and commendable.

This can be very uncommon for a company chief, extra so of a mega financial institution, to make use of the phrases ‘sorry’, ‘justifiably’ and ‘repair the issue’ in a message to traders. Contemplate the actual fact that previously a number of years, public sector banks (PSBs) have, within the case of obtrusive divergences in reporting non-performing property (NPAs), talked about these solely within the notes to accounts to the monetary statements, as mandated. There have been no regrets, explanations or considerations.

For HDFC Financial institution, India’s largest personal lender by property, inside disaster—within the type of inquiries, penalties and bans imposed by the regulator Reserve Financial institution of India—is unfamiliar territory. It has not solely triggered embarrassment for the financial institution however has additionally enabled ICICI Financial institution—certainly one of its rivals in retail banking—to achieve market share within the bank card market alongside SBI Card since December 2020, on the expense of HDFC Financial institution (see desk).

Regardless of a powerful set of earnings by wholesome income progress and regular asset high quality, valuations for HDFC Financial institution have dipped over the previous yr whereas these for ICICI Financial institution have risen in the identical interval. Improved quarterly earnings have boosted investor sentiment for ICICI Financial institution; the inventory has outperformed the Nifty Financial institution index, gaining 21.4 p.c in 2021 towards simply 10.9 p.c for the index and solely 3.8 p.c for the HDFC Financial institution inventory in 2021.

Whereas it’s fairly probably that HDFC Financial institution will climb again to normalcy within the bank card enterprise when the ban is lifted, the longer it’s out of the market the extra it is going to harm the financial institution. As of now, the ban is but to be lifted, with HDFC Financial institution awaiting communication from the RBI. HDFC Financial institution, with a 24 p.c market share, was the market chief in issuances of recent playing cards, which ranged between 1.5 to 2 lakh playing cards each month, previous to the ban.

The laborious rap on knuckles

Within the area of the previous two years, HDFC Financial institution has suffered three massive outages at its knowledge centre: First on November 27, 2018, when its next-generation cellular banking software crashed due to an enormous surge of consumers; the second through the first few days of December 2019, when internet banking and cellular banking functions suffered issues after which once more in November 2020.

Within the fallout, the RBI in December final yr issued an order which briefly banned HDFC Financial institution from launching its digital business-generating actions deliberate below its programme Digital 2.0, together with issuing new bank cards.
In one other embarrassing improvement, the RBI in Might this yr penalised HDFC Financial institution Rs 10 crore for wrongfully promoting third-party non-financial merchandise (GPS gadgets) to its auto mortgage prospects between 2015 and 2019. This contravened the provisions of the Banking Regulation Act 1949. The RBI motion got here after HDFC Financial institution probed into the matter based mostly on a whistleblower’s grievance to the RBI relating to the irregularities.

The financial institution had taken remedial motion towards six staff for improper lending within the auto loans division, whereas the one-year extension for its departmental head Ashok Khanna was not accredited and he retired in March 2020. “For a few years we had been bundling the financing of GPS programs and automobiles. The groups believed this was a routine lending exercise,” Jagdishan stated within the 2021 annual report.

Jagdishan, an HDFC Financial institution veteran of over 25 years and chosen, in 2019, by the financial institution because the ‘strategic change agent’, has normally solely seen exterior disaster comparable to rising NPAs, poor credit score offtake and the influence of the primary wave of the pandemic. Hardly ever has the financial institution witnessed inside battles of this nature.

How HDFC Bank's litany of crises has spelt opportunity for ICICI Bank

The truth that Jagdishan’s predecessor Aditya Puri, over a 26-year interval, constructed a financial institution that instructions a market capitalisation of $109 billion (as of July 1), meant that he all the time had big footwear to fill. Jagdishan’s doubters say after the RBI actions he had little alternative however to confess to the issues the financial institution confronted and try to begin afresh.

That is in all probability what gave rise to HDFC Financial institution’s ‘Challenge Future–Prepared” which Jagdishan introduced in April this yr, in an effort to create the required strategic and execution agility for the financial institution to serve its prospects. It contains redoubling its concentrate on verticals comparable to retail, company, personal banking and rising its concentrate on business banking, notably the micro- and small and medium enterprise vertical. HDFC Financial institution’s MSME mortgage e book has grown 30 p.c year-on-year to the touch Rs 2.02 lakh crore as of December finish.

The financial institution has additionally recognized 4 supply channels: department banking, tele-service/gross sales (together with digital relationship supervisor channel), gross sales channels aligned with the enterprise verticals, and digital advertising.

There’s a certain quantity of humbleness within the new regime. In an analyst name hosted by Morgan Stanley India on June 9, Jagdishan had stated: “I have to thank the regulator for rapping us in December 2020 because it has made us run sooner and suppose forward of time.” In a number of different analysts’ calls, he has reiterated that whereas expertise outages will proceed to happen [in the system], the essential issue is how resilient one is to resist it and the way swift the restoration time is.

World knowledge on tech outages at banks from a Goldman Sachs Might report exhibits such incidences are larger in abroad banks. Between June 2020 and Might 2021, HDFC Financial institution had 16 outages, in comparison with 24 for Nationwide Australia Financial institution, 39 for Wells Fargo, 40 for Citi, 52 for Financial institution of America and 73 for SBI, based mostly on Downdetector knowledge. However outages seem to last more for banks in India in comparison with the abroad ones. HDFC Financial institution has the very best—4.1 hours—period of outage and SBI 4 hours, in comparison with 2 hours for Nationwide Australia Financial institution, 1.7 hours for Wells Fargo, 2.7 hours for Citi and a couple of.5 hours for Financial institution of America.

Doing issues proper

This exhibits that the agility to cope with technological issues is weak in Indian banks. Whereas HDFC Financial institution waits for steerage from the regulator on the findings of the third-party audit report of its IT programs, the financial institution has began to strengthen its present expertise structure and make the shift in direction of new-age cloud-driven processes. “Banks basically had been laggard in transferring from their monolithic legacy-based programs and swiftly adopting next-generation processes, which some expertise giants and fintechs have been capable of do sooner,” says HDFC Financial institution’s chief data officer Ramesh Lakshminarayanan.

HDFC Financial institution is pivoting to a manufacturing unit method by a digital manufacturing unit and an enterprise manufacturing unit plan, the place it is going to roll out new digital services and products, he stated.

How HDFC Bank's litany of crises has spelt opportunity for ICICI Bank

Within the subsequent three months, HDFC Financial institution prospects may see adjustments to their present fee functions, comparable to PayZapp, and likewise a brand new platform for present bank card prospects. These platforms might be constructed on cloud-native stacks and never on standard knowledge centres.

The broader digital technique for the financial institution will probably embrace collaborating and partnering with a few of India’s high fintech unicorns, moreover incubating some new fintech startups with a co-ownership components and likewise creating and proudly owning its personal expertise IPs. Whereas declining to disclose precise expertise spends, Lakshminarayanan stated it is going to “transfer in keeping with world requirements” and be funded by present enterprise operations.

Among the latest digital funds knowledge is encouraging for HDFC Financial institution. Unified Funds Interface (UPI) Might 2021 knowledge on digital remittances from India’s high 30 banks exhibits HDFC Financial institution to have the bottom technical decline [read as failure rate] of 0.06 p.c and a debit reversal price of 99.95 p.c on a excessive quantity of 215.12 million transactions.

ICICI Financial institution is equally spectacular with a technical decline of simply 0.08 p.c and a DR of 94.5 p.c on volumes of 151 million. Equally, in beneficiary financial institution knowledge each HDFC Financial institution and ICICI Financial institution have a technical decline of simply 0.03 p.c every, on volumes of 143.07 million and 280.54 million respectively.

HDFC Financial institution has additionally managed to keep up its market share (by quantity) of UPI transactions at 8.7 p.c within the three months to March 2021, in comparison with 8.6 p.c within the earlier December-ended quarter. These knowledge factors give HDFC Financial institution the arrogance about stickiness of its prospects and guaranteeing that glitches are restricted.

How HDFC Bank's litany of crises has spelt opportunity for ICICI Bank

HDFC Financial institution’s Parag Rao, group head–funds, client finance, digital funds and IT, is assured that the financial institution “will return with a bang” within the bank cards phase. His optimism stems from the truth that regardless of the prevailing ban, HDFC Financial institution has managed to keep up its management place in bank card spends at 28.5 p.c, in comparison with 18.6 p.c for SBI Card and 17.6 p.c for ICICI Financial institution. However HDFC Financial institution must be involved as a result of ICICI Financial institution’s market share spend since March 2018 has risen 6.5 proportion factors and SBI Card by 2 proportion factors, in comparison with flattish progress for HDFC Financial institution.

“We’ve got used the final six months to introspect, re-engineer the playing cards enterprise, with our 15.5 million bank card prospects. We have to get again to our pre-embargo run price after which contact new milestones,” Rao says.

ICICI Financial institution gaining muscle

In HDFC Financial institution’s absence ICICI Financial institution has been a significant gainer in each issuance of recent bank cards and gaining market share (see desk). When it comes to new bank card additions, ICICI financial institution has seen an 18 p.c progress year-on-year. “ICICI Financial institution has seen a 20 to 30 p.c bounce in its market share between December 2020 and April this yr,” says Nitin Aggarwal, banking analyst at Motilal Oswal Monetary Companies. HDFC Financial institution’s bank card base has contracted by 389,424 between December 2020 and April 2021, RBI knowledge exhibits.

One of many essential components for its success within the bank cards enterprise has been its tie-up with Amazon Pay. In October 2020, the financial institution stated it had crossed the milestone of issuing over a million Amazon Pay ICICI Financial institution bank cards in simply 20 months since its launch. Bank cards is the biggest contributor to fee-based earnings for many banks.

Within the pandemic, ICICI Financial institution additionally received its retail lending combine proper, each in secured and unsecured lending, analysts say. Practically half of its retail e book is secured mortgages, which has seen a 21 p.c progress in quantity to Rs 2.43 lakh crore from ranges a yr in the past. “ICICI Financial institution was attempting to de-risk its e book and it has managed to do it higher than HDFC Financial institution, HDFC and Axis Financial institution,” Aggarwal stated.
How HDFC Bank's litany of crises has spelt opportunity for ICICI Bank

In its broad retail e book, ICICI Financial institution reported strong private and rural loans sequential progress of 6.4 p.c and seven p.c respectively for the March-ended quarter. ICICI Financial institution’s total retail e book grew 19.9 p.c year-on-year, which is especially spectacular coming in a pandemic yr, and outperforming a few of its different banking friends. HDFC Financial institution noticed a modest 6.7 p.c progress in its retail e book, Axis Financial institution noticed a ten p.c bounce and Kotak Mahindra Financial institution’s pure retail e book grew round 7 p.c.

ICICI Financial institution’s govt director Anup Bagchi says the financial institution was capable of seize alternatives a lot sooner than others because of the benefits in digital banking. He stated credit score supply has grow to be extra seamless and gained tempo, which has led to improved market share of the non-mortgage e book. Most analysts anticipate that except the third pandemic wave erupts, stress formation in retail lending might be below management, provisioning might be elevated and earnings restoration might be stronger within the second half of FY22.

ICICI Financial institution is now buying and selling at a a number of of round 3.2 occasions e book worth and about 2 occasions adjusted for subsidiaries e book. HDFC Financial institution is buying and selling at round 3.7 occasions e book, having improved in latest months however having been de-rated 10 p.c up to now one yr, analysts say. “ICICI Financial institution has narrowed the valuation hole and there’s extra to go in ICICI Financial institution’s favour,” says Motilal’s analyst Aggarwal. ICICI Financial institution in FY21 delivered double-digit RoE (of round 12.6 p.c) for the primary time since FY17, and is now projected to enhance to fifteen.2 p.c in FY23E.

Jagdishan’s legacy

How HDFC Bank's litany of crises has spelt opportunity for ICICI BankWithin the area of eight months Jagdishan has already put some issues so as by the Challenge Future-Prepared programme. On this means he has additionally began to create a brand new profile for himself which has already moved out of Aditya Puri’s lengthy shadow. “That is in all probability his means of claiming that I’m my very own particular person,” says enterprise journalist Tamal Bandhopadhyay, who chronicled HDFC Financial institution’s digital journey in his e book HDFC Financial institution 2.0: From Daybreak to Digital. Bandhopadhyay additionally says that whereas a number of banks at present are “extraordinarily savvy” of their digital banking journey, Aditya Puri was properly forward of his time by way of getting the financial institution onto the digital journey.

Unbiased banking skilled Hemindra Hazari, who has studied the governance of banks in India extensively, says that he was “not shocked” that every one these occasions have come to mild in latest months, put up Puri’s retirement. “Puri was so focussed on attaining targets and getting the ladoo in every enterprise line that compliance took a backseat below his management,” Hazari says. Jagdishan is firmly attempting to right this whereas not compromising on progress. “Jagdishan is doing an sincere job.’

The expertise audit report’s findings however, HDFC Financial institution, like most different banks, might want to see how dangerous loans play out within the unsecured retail lending area in coming quarters. Lakshminarayanan is, nevertheless, assured that the learnings from all these episodes will solely make the financial institution stronger. “Corporations that are awake and perceive the shopper pulse are those that may transfer forward. Our prospects will resolve which means we go. If make this pivot shortly, prospects will communicate for us.”

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