RBI action on Paytm Payments Bank incrementally negative for One 97, says Bernstein; retains ‘Outperform’, sees 30% upside

The Reserve Bank of India’s decision to cancel the banking licence of Paytm Payments Bank Limited (PPBL) is likely to be incrementally negative for its parent, One 97 Communications, according to a note by Bernstein. The brokerage described the regulator’s language in its communication as “harsh” and “concerning.” That said, the Societe Generale Group-backed brokerage has retained an ‘Outperform’ rating on Paytm, with a target price of Rs 1,500, implying an upside of around 30% from current levels.

“While Paytm has no role in the current management/board of PPBL (despite the 49% ownership), the harsh language in the RBI’s letter is concerning,” Bernstein said, noting the history of regulatory actions against the business.

“Post the RBI restrictions on Paytm Payments Bank Limited (PPBL) in early 2024, the company did put in time and effort to terminate the interlinkages between PPBL and the core business, reconstitute the board, and take steps to potentially revive operations of the bank,” the note said.

What RBI said?

The central bank’s Friday decision comes after more than two years. In January 2024, RBI ordered the bank to stop accepting fresh deposits after finding the company in non-compliance with rules concerning lapses in customer due diligence, use of funds, and technology infrastructure.

Paytm had obtained a limited banking license in August 2015 that allowed it to take small deposits but not give out loans.

“The affairs of the bank were conducted in a manner detrimental to the interest of the bank and its depositors,” the RBI said in its statement on Friday. “The general character of the management of the bank is prejudicial to the interest of depositors as also the public interest,” the statement said, adding “No useful ⁠purpose or ‌public interest would be served by allowing the bank to continue.”

The RBI also said on Friday it would apply to the high court for winding up the bank.

Following the 2024 curbs, the bank ⁠remained operational, but its activities were severely limited to processing withdrawals of existing deposits and facilitating loan referrals through banking correspondents, according to its website.

Also read: RBI cancels Paytm bank license, to approach high court

Bernstein’s view on Paytm’s business

The brokerage sees no impact on current business or numbers as the operations of PPBL have been suspended for more than a year and the company had created clear separation between the payments bank and the parent company, especially after the regulatory action in early 2024.

Moreover, the company had taken a write-off related to its investment in PPBL so any one-offs is not expected either, the note added.

Post the RBI restrictions on PPBL in early 2024, the company put-in time and effort to terminate the interlinkages between PPBL and the core business, reconstitute the board, and take steps to potentially revive operations of the bank, the note said.

Silver linings for the super optimistic investor

Bernstein believes this development could clear the way for the company to apply for an NBFC or PPI license which might enable Paytm to offer certain payments products (e.g. wallet) and credit products.

Company version

“As previously disclosed on March 1, 2024, the Company does not have any exposure to PPBL or any material business arrangements with PPBL. No services provided by the Company are in partnership with PPBL. Additionally, PPBL operates independently, with no board or management involvement from the Company. There is no direct financial impact on the Company since, as previously disclosed, the Company had already impaired its investment in PPBL as of March 31, 2024.”

“As informed earlier, Paytm (One 97 Communications Limited) and its services, which have been operating without interruption, will continue to operate uninterrupted. These include the Paytm app, Paytm UPI, Paytm Gold and all other services offered by its subsidiaries and associated companies such as Paytm QR, Paytm Soundbox, Paytm card machines, and Paytm Payment Gateway, Paytm Money among others. We would point out to all stakeholders that this matter is related to PPBL, a separate entity, and any reference to this matter should be made solely in the context of PPBL, and not attributed to the Company.”

Paytm share price performance

Paytm shares have outperformed domestic benchmarks Nifty and the BSE Sensex with returns of 26% over a one-year period compared to near 1% and 4% fall, respectively in both frontline indices.

The stock is currently trading above its 50-day simple moving average (SMA of Rs 1,091 while slipping below the 200-SMA of Rs 1,184.

(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)