HDFC Bank, India’s premier private sector bank, has carved a niche in the financial sector with its market dominance and consistent, robust financial outcomes. It has been in our JEWEL portfolio for some time now. Despite its recent underperformance, it presents an opportune moment to understand what makes HDFC Bank a good ‘Roots & Wings’ stock, driven by two main criteria: its Roots, i.e. the strength and durability of its competitive edge, and its Wings, i.e. sustainable growth rate. HDFC Bank does well in both areas.
Recent Quarter
Coming to the Q3 FY 24 performance, the bank’s year-over-year sales surged by a notable 73.34%, complemented by an impressive PAT increase of 39.12%. Despite minor fluctuations in Net Interest Margin (NIM) and a slight uptick in Gross Non-Performing Assets (NPA), HDFC Bank’s strategic focus on deposit growth, targeted customer segmentation, and branch expansion highlight its drive towards sustained growth.
Evaluating the bank’s inclusion in our portfolio pivots on two critical considerations: the durability of its competitive edge (Roots) and its potential for sustainable growth (Wings). On both fronts, HDFC Bank does well, attributing its competitive advantage primarily to its ability to secure low-cost funds via CASA (Current Account Savings Account) deposits and uphold stringent credit discipline.
Strong Foundation
In an era where the banking sector has observed a 9.8% pa deposit growth over the decade leading up to March 2023 (pre-merger metrics), HDFC Bank has remarkably outpaced at a 20.3% annual growth rate. The bank’s CASA deposits have surged at an annual rate of 19.5% over the past decade and an even more impressive 25.0% over two decades, significantly outperforming the industry’s growth rates. This robust loan book, powered by its extensive branch network, is integral to HDFC Bank’s sustained competitive advantage.
Known for its stringent credit discipline within the industry, HDFC Bank has consistently reported the sector’s lowest Gross NPAs over two decades. During the banking turmoil between FY2016 and FY2018, triggered by the RBI’s Asset Quality Review, HDFC Bank stood unscathed without a single significant case in NCLT courts, showcasing its exceptional credit discipline culture.
Future Potential
The bank’s potential for continued rapid growth, despite reaching considerable size, endures. The bank envisions further broadening its branch footprint and augmenting its unsecured loan portfolio, all the while safeguarding profitability and enriching its cross-selling opportunities. With the post-merger integration process underway, our stance leans towards maintaining and observing the stock’s trajectory in the forthcoming quarters.
With PSU banks still holding a significant share of total and CASA deposits, ample scope exists for private banks, including HDFC Bank, to further capture market share. The relentless increase in HDFC Bank’s market share is anticipated to persist, emphasizing deposits over advances as the sustainable driver of bank loans.
Also, HDFC Bank’s aggressive branch expansion over the last five years aims to fortify its liability base, positioning itself for future growth. The vision of matching or surpassing SBI’s magnitude seems plausible with this strategic branch expansion.
Concerns
Despite the strength of HDFC Bank’s case, there are concerns on future growth. We see the merger’s promising potential precisely because HDFC Bank lacked direct access to home loan customers, a segment with immense long-term value and cross-selling potential. Some concerns regarding the inheritance of HDFC Limited’s NPAs and the technical implications on global indices due to FPI ownership restrictions have also been expressed. Nonetheless, these concerns, while relevant for short-term market dynamics, do not detract from the long-term investment thesis centered on earnings growth.
Conclusion
To sum up, despite brickbats, HDFC Bank has shown a significant surge in Q3 FY 24 sales and PAT, coupled with strategic branch expansions and a focus on low-cost funds and credit discipline. Despite challenges, its market share expansion and prudent investment strategies underscore its resilience. Currently trading at an appealing valuation, HDFC Bank offers a promising opportunity for long-term investors.
