Within the first three weeks of 2015, HDFC Bank (HDB, Financial) has surged by 12.5% and I believe that the rally in this banking stock is likely to continue throughout 2015. This article discusses the reasons to be bullish on HDFC Bank for the current year and also for the long-term.
Coming to the reason for the recent surge in the stock, the Indian central bank cut interest rates by 25 basis points last week and the banking stocks surged on this surprise move. Further, I believe that the Indian central bank is likely to cut interest rates by another 75-100 basis points in 2015 as lower crude oil prices have cooled down inflation in India.
Also, with significant reforms expected by the government in the coming months, there is a likelihood that the Indian central bank also responds to growth initiatives by cutting interest rates. The development will continue to be positive for the Indian banking sector and HDFC is well positioned, being the second largest private bank in the country.
I therefore expect lower interest rates to trigger strong credit growth and HDFC is likely to report strong results in the coming quarters.
Other than the interest rate factor, HDFC is well positioned to grow with a strong focus on semi-urban and rural banking in India. As of March 2014, 56% of the company’s operating branches were in the semi-urban and rural areas as compared to 40% in March 2011.
The focus on this segment has helped HDFC bank improve its core CASA ratio (current and savings deposits). As a result of the low funding cost, the company’s net interest margin is among the best in the Indian banking industry. As of March 2014, HDFC Bank has a net interest margin of 4.37%. The company’s low funding cost is the biggest reason (company specific factors) to be bullish on the stock at a time when interest rates are likely to come down in India.
Another big reason to be bullish on HDFC Bank is the loan quality. As of 2014, the bank had a gross NPA of 0.98% and a net NPA of 0.27%. Therefore, the loan quality is excellent and this provides a perfect platform for HDFC Bank to speed up credit growth as the economy gets robust. HDFC Bank also has a capital adequacy ratio of 15.7% of which Tier I is 11.8%.
In terms of EPS growth, HDFC Bank’s EPS has increased from Indian rupee 13.5 in 2010 to Indian rupee 35.5 by 2014. Therefore, even in relatively dull times for the economy, the company’s EPS growth has been robust and the reason has been the bank’s focus on the semi-rural and rural areas.
With economic growth picking-up, the EPS growth trend will be even better in the coming quarters. All these factors have translated into strong upside for HDFC Bank in 2014 and in early 2015.
Besides the stock appreciation prospects, HDFC Bank also offers a dividend payout of $0.32 per share and I believe that the dividend payout will also increase on a consistent basis over the next 3-5 years.
Therefore, HDFC Bank is certainly a stock worth considering at current levels. Even after the recent rally, the attractiveness of the stock has not diminished and the bank looks good for a rally through 2015.
