HDFC Bank: On a strong footing

The banking sector has been grappling with one too many challenges over the past two years. Slowing lending activity, rising bad loans hurting profitability and introduction of marginal cost of funds-based lending rate impacting operational flexibility — these are some key hurdles that have impacted banks’ earnings. With the recent demonetisation move, the banking system is up against a host of fresh challenges. The massive inflows of old notes have put a strain on banks’ daily operations, leading to increase in cash management and logistics cost.

Add to this, markets have been in a state of frenzy; many stocks have fallen notably since the demonetisation move. In such times, blue chip bank stocks are a sound bet.

HDFC Bank has been one of the most resilient banks, tiding over industry-wide challenges well. Steady loan growth, low delinquency and ability to safeguard margins have kept it on a strong footing. Over the last three weeks, the stock has fallen by about 6 per cent, offering good scope for long-term investors to accumulate the stock.

At the current price, the stock trades at 3.3 times its one-year forward book value. This is still lower than its long-term (since 2009) historical average of 3.4 times and peak levels of four times. Given that the bank’s earnings can grow by 20-22 per cent over the next two years, the stock can offer good scope for appreciation in a volatile market.

Over the past year, HDFC Bank has gained ground as its peers such as ICICI Bank and Axis Bank lagged in performance due to rising asset quality concerns. During the September quarter of last fiscal, HDFC Bank raced ahead of its peer, ICICI Bank, which until then enjoyed the status of the largest private bank in terms of loans.

HDFC Bank has clocked 22-27 per cent year-on-year growth in loans over the last seven to eight quarters vis-à-vis ICICI Bank’s 13-15 per cent. While in the latest September quarter, HDFC Bank delivered a marginally lower growth in loans at 18 per cent, mainly due to lower traction in corporate loans, its overall performance still remains healthy.

For one, market share gains over the past eight quarters point to the bank’s strong positioning in key segments. The bank has gained nearly 2 percentage points market share in overall bank lending over the past eight quarters or so.

Two, growth in loans continues to be healthy across segments. All segments within retail continue to do well. Auto and two wheeler loans grew by 23 per cent, while personal loans grew by a robust 40 per cent in the September quarter vis-a-vis same quarter last year. Also, HDFC Bank continues to enjoy the largest market share in credit cards in the industry with ₹21,336 crore loan book as of September 2016, which fetch higher margins and returns. Healthy traction in high-yielding retail loans should continue to keep the bank’s margins on a relatively better footing.

On the corporate side, large portion of bank’s lending has always been for working capital financing, insulating it from the weak investment activity. In the December quarter, there can be some impact on account of the unwinding of the leveraged product it offered under the FCNR deposit scheme. HDFC Bank raised $3.4 billion through FCNR deposits.

This leveraged product (the bank extended an overdraft to NRI depositors, with a lien on deposits) to the tune of $1.9 billion or ₹12,000 crore will be unwound in the December quarter. However, the impact due to this will be minimal as total overseas loans are just 6.7 per cent of loans. Also, as the yields on such loans are lower than that earned on domestic loans, there will be little impact on the overall bank’s net interest margin.

Healthy growth in loans, good share in low-cost current and savings account (CASA) deposits and low delinquencies have helped the bank retain its industry leading returns — return on assets are around 2 per cent. The bank’s net interest margin (NIM) has been within a narrow 4.2-4.3 per cent range. HDFC Bank has been relatively better placed to safeguard its margins under MCLR, as about 70 per cent of loans are fixed rate loans.

At a time when its peers such as ICICI Bank and Axis Bank are facing substantial slippages from their exposure to troubled sectors such as infrastructure and power, HDFC Bank has managed to keep its gross non-performing assets (GNPAs) within a low range of 0.9-1 per cent. With lower burden on capital, the bank is better placed to cash in on a pick up in economic growth, when it happens.

In the near term, banks are likely to be impacted by the demonetisation move. HDFC Bank’s size, wide network, extensive digital initiatives and leadership position should help it weather these hitches better.

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