HDFC Bank’s Credit Card Loss Is ____ Gain?
Visa Inc. and Mastercard Inc. credit cards are arranged for a photograph. (Photographer: Daniel Acker/Bloomberg)

HDFC Bank’s Credit Card Loss Is ____ Gain?

HDFC Bank Ltd, which has the largest credit card base in the country, was stopped by the Reserve Bank of India from issuing new cards starting December due to a series of digital banking outages. Since then, HDFC Bank’s loss has been someone else’s gain. And that someone, according to early data, may be HDFC Bank’s long time competitor and the country’s second-largest private lender — ICICI Bank Ltd.

A BloombergQuint analysis of monthly credit card issuance data released by the RBI shows:

  • ICICI Bank managed to capture 43.4% of the incremental cards issued by banks between Nov. 30, 2020 and Feb. 28, 2021. The lender issued 6.66 lakh cards out of the total 15.34 lakh new credit cards given out by the system.

  • This is a 13-percentage-point jump from the 30.77% share of incremental cards that ICICI Bank garnered in the September-November 2020 period, before the RBI asked HDFC Bank to stop issuing fresh cards.

  • Others may have gained as well. SBI Cards & Payment Services Ltd., issued 29% of the incremental cards between November 2020 and February 2021, compared to 20.14% in the prior three months.

  • Axis Bank Ltd. saw its share rise to almost 10% from under 1%.

As of Feb. 28, ICICI Bank had 1.04 crore credit cards in circulation compared to HDFC Bank’s 1.52 crore cards. HDFC Bank saw its outstanding cards portfolio decline by 1.89 lakh cards between November and February, the data showed.

ICICI Bank and HDFC Bank did not respond to queries mailed on Tuesday.

For ICICI, A Shift In Strategy

To be sure, ICICI Bank may have benefited not just from the troubles of its competitors but also from a product which has gained popularity.

In October 2018, the lender had launched a new card offering — the ICICI-Amazon Pay credit card. By December 2020, or a little over two years since its launch, there were 1.4 million or 14 lakh ICICI-Amazon Pay credit cards in the market, according to an April 15 report by Bernstein. The credit card has helped ICICI Bank grow its credit card loans at a compounded annual rate of 25% since it launch and it forms 33% of total new card issuances by the lender since October 2018, the Bernstein report said.

“What we are seeing is that banks with a well structured e-commerce linked card product are really pushing the momentum for cards growth right now. This is understandable during the pandemic because travel and entertainment spends have been curtailed to a large extent,” said Gautam Chhugani of Bernstein Research.

For ICICI, a return to a focus on credit cards is a shift in its strategy from de-emphasizing unsecured lending products because of its experience after the global financial crisis. At the time, the lender had seen large defaults across its credit card portfolio.

However, the growth in cards is now coming mostly from existing customers.

About 70% of ICICI’s credit card portfolio is with the bank’s existing customer base, according to a bank presentation released after its December-quarter earnings. Salaried customers formed 85% of the outstanding cards as on Dec. 31, while three-fourths of the salaried credit card customers came from well rated corporates. multi-national companies and government firms, where likelihood of job losses is lower.

According to data collated by Bernstein the bank’s credit card portfolio showed a 10% compounded annual growth rate between March 2014 and March 2018. Since then, however, ICICI Bank’s credit card business rose 35% on a compounded annual basis.

To be sure, credit card loans still form a small portion of the total retail loan portfolio. As on Dec. 31, ICICI Bank’s outstanding credit card loans stood at Rs 17,263 crore, as compared with the retail loan portfolio of Rs 4.58 lakh crore.

Fee income gains, too, may only accrue over time.

“The rise in the number of cards may not have an immediate impact on financials, but it is a good source of revenue for the longer term. As of now, the avenues for credit card spends are fewer. But as things improve and spends increase, this rise in card base will help banks like ICICI Bank post higher retail fee income,” said Siddharth Purohit, banking analyst at SMC Global Securities.

What Is HDFC Bank’s Plan-B?

On its part, HDFC Bank has been attempting to return to the market by seeking necessary approvals from the RBI. The regulator had introduced the ban after repeated system outages at the bank over the last two years and asked the bank to review its IT infrastructure. A third-party audit of the bank’s IT infrastructure had also been ordered.

“We have invested heavily in the scale up of our infrastructure to handle any potential load that we will encounter for the next three-five years. We are also in the process of accelerating our cloud strategy to be on the cutting edge leveraging best in class cloud service providers,” Sashidhar Jagdishan, chief executive officer of HDFC Bank, said in a letter to employees on Monday, a copy of which was reviewed by BloombergQuint.

On April 17, while speaking to analysts after its quarterly earnings, HDFC Bank’s Chief Financial Officer Srinivasan Vaidyanathan said the bank added 20 lakh new liability relationships during the January-March quarter alone and about 70 lakh new relationships in the last 12 months.

Once the RBI approvals are in place, the bank can mobilise this base of new customers to quickly issue new cards and cover any gap which may have been created in the credit cards market, an HDFC Bank official said on the condition of anonymity.

As a backup option though, the bank is looking at providing credit products to its debit card customers for now.

Nearly three-fourths of our credit card base comes from existing customers. For now the new customers have debit cards, so we are offering installment loans on debit cards to them. At some possible time we may also offer a revolving facility on debit cards to salary accounts.
Srinivasan Vaidyanathan, CFO, HDFC Bank

During the analyst call, Vaidyanathan told analysts that the third-party audit ordered by the RBI is in the final stages.

Analysts don’t see the bar on credit card issuance as a major hurdle for HDFC Bank.

“Already the market is discounting the recent trend in Covid-19 cases and the problems with the vaccination drive, which is visible in the underperformance of the banking indices. In about a quarter or two, whenever HDFC Bank is allowed to resume its credit card issuances, it will come with a much clearer understanding of a customer’s risk profile and the trajectory of the asset quality trends in the near future,” said Amit Khurana, head of equities at Dolat Capital.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.