An Indian Bank That’s Leading the Way
Although a slowing economy and political turmoil have created a volatile investment climate in India this year, HDFC Bank (NYSE: HDB) has gained more than 30 percent year to date, compared to about 12 percent for the broader Indian market.
Political gridlock in New Delhi is a major hurdle for investors, as the fractious governing coalition remains unable to reach consensus on ways to revitalize the economy since the last seven-year investment cycle ended in 2010.
This uncertainty brought the usually high-flying Indian market down in a hurry, and it has just started to rally this summer. That said, the price of equities is now factoring in a lot of bad news. The BSE Sensex is currently trading at around 2.2 times book value, compared with a 10-year average of 2.8 times and a long-term average since 1996 of 3.2 times.
Inflation worries also have beset investors, but India’s weak first-quarter 2012 gross domestic product (GDP) growth of 5.3 percent year-over-year has helped push inflation to below 5 percent.
India’s macro picture is not the prettiest in Asia right now. However, given the economy’s great potential and size, foreign institutional investors have been reluctant to sell out of positions and are opting instead to wait. Failure by the country’s feuding politicians to eventually push through necessary structural changes may eventually lead these investors to sell, indicating a loss of faith in the Indian story.
HDFC Bank should be in every long-term oriented investor’s portfolio. Even in the current environment, the bank’s management is confident of growing revenue up to 6 percent higher than the industry’s average growth rate, given that a large portion of branches have been added recently and are yet to reach optimal capacity. At the same time, the bank has achieved the lowest cost per employee in the industry.
Corporate loans are picking up for the bank, while retail has been holding steady. The only segment within retail that has slowed is construction equipment, while mortgages, auto, two-wheelers and business banking continue to do well. Within the corporate book, 60 percent is comprised of large corporate entities, 20 percent emerging smaller companies, and the rest general business banking.
The bank is following the government’s guidelines for priority sector lending. Consequently, the majority of HDFC Bank’s new branches are located in non-metropolitan regions that are underpenetrated by the banking industry. This is the result of a regulatory mandate that management has used to attract more savings accounts from smaller towns. About 62 percent of HDFC Bank’s branches are outside India’s nine biggest cities.
The Indian government has placed an emphasis on lending to the agricultural sector, as the government continues to nurture peripheral growth. India’s economic plan closely mirrors China’s roadmap in which non-urban areas are provided assistance and incentives to grow faster and participate in the country’s economic boom. The bank’s direct agricultural related business has grown from about 8 percent in 2010 to 12 percent now.
HDFC Bank’s current and savings account (CASA) ratio has also been improving. CASA is a good metric for Indian banks because it compares current and savings account deposits to total deposits. The interest paid on CASA deposits is lower than other deposits; a higher CASA ratio indicates a lower cost of financing for the bank. Management aims to keep adding around two million CASA accounts every year.
From a longer-term perspective, the bank is a big beneficiary of a demographically young nation with rising incomes and strong domestic demand. HDFC Bank remains a buy at current prices.
Political gridlock in New Delhi is a major hurdle for investors, as the fractious governing coalition remains unable to reach consensus on ways to revitalize the economy since the last seven-year investment cycle ended in 2010.
This uncertainty brought the usually high-flying Indian market down in a hurry, and it has just started to rally this summer. That said, the price of equities is now factoring in a lot of bad news. The BSE Sensex is currently trading at around 2.2 times book value, compared with a 10-year average of 2.8 times and a long-term average since 1996 of 3.2 times.
Inflation worries also have beset investors, but India’s weak first-quarter 2012 gross domestic product (GDP) growth of 5.3 percent year-over-year has helped push inflation to below 5 percent.
India’s macro picture is not the prettiest in Asia right now. However, given the economy’s great potential and size, foreign institutional investors have been reluctant to sell out of positions and are opting instead to wait. Failure by the country’s feuding politicians to eventually push through necessary structural changes may eventually lead these investors to sell, indicating a loss of faith in the Indian story.
HDFC Bank should be in every long-term oriented investor’s portfolio. Even in the current environment, the bank’s management is confident of growing revenue up to 6 percent higher than the industry’s average growth rate, given that a large portion of branches have been added recently and are yet to reach optimal capacity. At the same time, the bank has achieved the lowest cost per employee in the industry.
Corporate loans are picking up for the bank, while retail has been holding steady. The only segment within retail that has slowed is construction equipment, while mortgages, auto, two-wheelers and business banking continue to do well. Within the corporate book, 60 percent is comprised of large corporate entities, 20 percent emerging smaller companies, and the rest general business banking.
The bank is following the government’s guidelines for priority sector lending. Consequently, the majority of HDFC Bank’s new branches are located in non-metropolitan regions that are underpenetrated by the banking industry. This is the result of a regulatory mandate that management has used to attract more savings accounts from smaller towns. About 62 percent of HDFC Bank’s branches are outside India’s nine biggest cities.
The Indian government has placed an emphasis on lending to the agricultural sector, as the government continues to nurture peripheral growth. India’s economic plan closely mirrors China’s roadmap in which non-urban areas are provided assistance and incentives to grow faster and participate in the country’s economic boom. The bank’s direct agricultural related business has grown from about 8 percent in 2010 to 12 percent now.
HDFC Bank’s current and savings account (CASA) ratio has also been improving. CASA is a good metric for Indian banks because it compares current and savings account deposits to total deposits. The interest paid on CASA deposits is lower than other deposits; a higher CASA ratio indicates a lower cost of financing for the bank. Management aims to keep adding around two million CASA accounts every year.
From a longer-term perspective, the bank is a big beneficiary of a demographically young nation with rising incomes and strong domestic demand. HDFC Bank remains a buy at current prices.