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Faisal Humayun
Faisal Humayun
Articles (633)  | Author's Website |

Best Time to Buy HDFC Bank

April 11, 2014 | About:

The banking sector has a very close relationship with the economy in terms of the sectors' growth. A robust economy would imply robust credit growth and the banking sector stands to be a direct beneficiary. With a government change likely in India in May 2014, the party slated to come to power promises significant economic reforms. The Indian equity markets are already discounting the positive with the market at record high levels. Individual stocks, however, still hold immense potential, and this article discusses why HDFC Bank (NYSE:HDB) can be a catalyst for the portfolio.

About HDFC Bank

HDFC Bank (NYSE:HDB) is the second largest private sector bank in India and can potentially become the largest private sector bank by overtaking ICICI Bank (NYSE:IBN) relatively soon. As of Sept. 30, 2013, the company operated a network of 3,251 branches and 11,177 ATMs in 2,022 cities/towns. For the year ended March 2013, HDFC Bank had a total asset size of $71 billion with one of the best asset qualities (net NPA of 0.2%). Further, the bank had a net interest margin of 4.47% for the same period.

On Indian Financial Services Penetration

Before discussing the positives related to HDFC Bank, I would like to provide some numbers related to the penetration of the financial services industry in India. These numbers will underscore the point that there is immense scope of growth for the Indian banking sector and HDFC Bank is well positioned to capitalize on the growth (being the second largest player in the Indian banking industry).

According to the Reserve Bank of India, 57% of the population has a savings bank account, 10% and 0.6% of the population have life and non-life insurance, respectively. Further, only 13% of the population holds a debit card, and 2% have credit cards. To top all these statistics, the consumer debt to GDP for India is just 8.5%.

With an improving economy, rising income levels, rising standards of living and increasing awareness of financial products, the upside growth potential for the banking sector is huge.

On Interest Rates In India

Another factor, which is important to discuss before discussing the fundamentals of HDFC Bank, is the prevailing interest rates in India. This is important to discuss because higher interest rates have resulted in relatively depressed banking sector stock performance.

However, I do believe that the interest rates have peaked out in India with the repo rate at 8% and reverse repo rate at 7%. With the government likely to change in May 2014, new economic reforms should help curb inflation. Investors can therefore expect that interest rates trend down from current levels on the foreseeable future. This will be positive for the banking stocks.

HDFC Bank’s Growth Strategy

HDFC Bank had an aggressive growth strategy in the last few years (revenue CAGR of 32% from 2003 to 2013) and that has been associated with high asset quality (NPA of 0.2%) and a superior net interest margin. I believe that the company’s growth will sustain in the medium to long-term judging by the growth strategy the company follows.

HDFC Bank’s primary emphasis is on retail banking, and the bank has made significant inroads in the Indian rural sector. This gives HDFC Bank an edge over its peers and gives the bank the necessary growth momentum with huge under-penetration in the Indian rural banking sector.

To back my point with numbers, the company's rural and semi-urban branches have increased to 53% of the total number of branches in March 2013 compared to 34% in March 2010. Given the penetration numbers discussed above, the potential for growth is still immense and HDFC should continue to grow at a robust pace.

High CASA Ratio Supports Growth

Another key differentiating factor for HDFC Bank as compared to its closest peer, ICICI Bank is the net interest margin the bank generates. HDFC Bank has a net interest margin of 4.6% as compared to 3.2% for ICICI Bank. The higher net interest margin is due to a higher CASA ratio.

HDFC Bank had a CASA ratio of 47.4% for the year ended March 2013 compared to 41.9% for ICICI Bank. The CASA ratio indicates a higher portion of bank deposits coming from current and savings account, which means that the bank is getting money at a lower cost. As HDFC Bank continues to penetrate in the semi-urban and rural areas, the CASA ratio will remain strong and give the bank an edge over its peers.


HDFC Bank is among the strongest private sector banks in India. The bank has shown immense strength in the credit crisis and the bank's low NPA makes it a safe deposit haven for the retail population.

The bank's key metrics are strong and HDFC is well placed financially to grow at a robust pace as the Indian economy recovers. Political change and lower inflation will add to the growth momentum for HDFC Bank. Investors can consider exposure to the Indian banking giant with a one- to two-year time horizon for robust returns.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with eight years of experience in equity research, credit research, economic research and financial modeling.

Visit Faisal Humayun's Website

Rating: 4.0/5 (1 vote)



MritikCapital - 3 years ago    Report SPAM

Hi Kashafa,

I appreciate your article about an emerging market stock on GuruFocus.

In my opinion Best time to buy IBN, HDB was in Sep 2013 when capital was fleeing the emerging markets and when USDINR was down 20% to 70.

These are still good banks with lot of long term growth potential due to many people in rural India not having any bank account yet but the margin of safety is gone now. The new banking licenses that will be granted by RBI after the Indian election may increase the competition as well.

Faisal Humayun
Faisal Humayun - 3 years ago    Report SPAM

Thanks for your comment and you make an important point on the bank licenses.

I personally believe that the sector has a lot of depth to absorb more players and also benefit players with greater financial flexibility and reach. One might argue that the markets have edged higher significantly. I believe that the best part of growth for India is still to come. China grew at 10% for nearly 30 years. India has not seen that kind of growth. It should ideally come with a good government and good governance.

Enjoylife premium member - 3 years ago

Hi Kashafa,

Thank you for the article. The valuation of this bank seems extremely high compared to American Banks. Trading at over 4x book value and a debt to equity over 1 makes this play extremely risky.

Several US banks like C and BAC trade at discounts to book with similar leverage. There is huge growth expectation built into the price and if that doesn't happen the down side could be bad.

It seems very dangerous to recomend this bank at the current price level.

Thank you.



Faisal Humayun
Faisal Humayun - 3 years ago    Report SPAM

I believe that it might not be a great idea to compare Indian banks with US banks in terms of valuation. Huge differences exist in terms of complexity of the banks, size of the banks, asset quality, growth potential and the enviornment in which they operate.

Yes, one can compare Indian banks with other Indian banks. That seems fair. While the Indian markets are significantly above their all time highs, HDB is still a laggard (relatively). As interest rates decline in India, the banks will outperform. And HDB is well positioned to do so.


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