HDFC Bank

The Indian banking sector is on the rise due to strong economic growth, increased disposable incomes, growing consumerism, and easier credit access. Under these conditions, HDFC Bank continues to post an impressive growth curve though beset by some challenges too 

HDFC Bank Limited, headquartered in Mumbai, stands as India’s largest private sector bank in terms of assets and ranks as the fourth-largest globally by market capitalisation, as of July 2023. This significant stature was achieved through its acquisition of the parent company HDFC, solidifying its market capitalisation at USD 172 billion and placing it as the 16th largest employer in India, with an employee count nearing 1.73 lakhs. Diverse in its offerings, HDFC Bank provides a comprehensive range of financial products and services encompassing wholesale banking, retail banking, treasury operations, and lending options like automobile loans, personal loans and credit cards.

Within its wholesale banking sphere, HDFC Bank caters to an extensive clientele comprising large corporates, multinational corporations, public sector enterprises, emerging corporates, and SMEs. It offers a suite of services including loans, deposits, project finance, trade credit, and investment banking services, among others. On the retail front, HDFC Bank tailors its products and services to suit the needs of individuals, salaried professionals, small businesses, SHGs and NRIs.

Its services span savings and current accounts, diverse loan offerings, credit and debit cards, digital wallets, insurance, investment products and remittance services, all geared towards enhancing customer convenience through digital channels like mobile banking, net banking and chatbot support. Meanwhile, HDFC Bank’s Treasury Department plays a crucial role in managing the bank’s liquidity, interest rate risks, and statutory reserve requirements. It also assists customers in handling foreign exchange and interest rate risks while generating fee income from customer transactions.In essence, HDFC Bank’s multifaceted operations and commitment to innovation have solidified its position as a leading force in India’s banking and financial services sector.
 

Sector Overview

In the fiscal year 2022-23, India’s Gross Domestic Product (GDP) exhibited a growth rate of 7.2 per cent, according to the latest estimates released by the Central Statistical Organisation. This represents moderation from the robust 9.1 per cent growth observed in the previous fiscal year, 2021-22. The deceleration in growth can largely be attributed to the base effect, stemming from the negative economic impact of the pandemic in the fiscal year 2020-21.

Despite these challenges, systemic liquidity in India remained in surplus for most of the fiscal year 2022-23. Nevertheless, the Reserve Bank of India (RBI) initiated a series of rate hikes starting from May 2022, cumulatively increasing rates by 250 basis points over the year. These rate hikes were primarily in response to external factors, including geopolitical tensions, sanctions, elevated commodity prices, and lingering supply chain disruptions related to the corona virus pandemic.

The Indian banking sector is on the rise due to strong economic growth, increased disposable incomes, growing consumerism, and easier credit access. Both corporate and retail loan demand is increasing, led by services, real estate, consumer durables, and agriculture-related sectors. India is among the world’s fastest-growing fintech markets, with over 2,000 DPIIT(Department for Promotion of Industry and Internal Trade)-recognised fintech firms, a number that’s rapidly expanding. With a young population (65 per cent under 35), India, already having the second-highest number of smart phone and internet users globally, is set to become the world’s third-largest consumer economy by 2030 and the domestic banking sector is projected to become the thirdlargest by 2050. 

Bank credit has rebounded strongly, growing at 18.1 per cent post-pandemic recovery, with private and new banks gaining market share. Non-food bank credit grew by 15.3 per cent YoY in December 2022, compared to 9.4 per cent a year ago. In summary, while India faces headwinds from global uncertainties, its domestic resilience, as demonstrated in the fiscal year 2022-23, positions it well to weather future challenges and continue as a bright spot in the global economic landscape.

Financial Overview

Looking at the financial performance of HDFC Bank Ltd. on a consolidated basis, the bank reported stellar Q1FY24 results in which total revenue of the bank surged by 37.2 per cent to ₹51,168 crore as compared to ₹37,274 crore in Q1FY23, while the operating profit of the bank grew by 14.4 per cent to ₹6,744 crore as against to ₹5,895 crore in Q1FY23. Similarly, netprofit of the bank jumped by 29 per cent and stood at ₹12,403 crore as compared to ₹9,617 crore in Q1FY23. Furthermore, HDFC Bank added 39 new branches in Q1FY24 and 1,482 new branches in the past 12 months, totalling 7,860 branches. 

In Q1FY24, the bank’s liquidity coverage ratio (LCR) stood at 126 per cent, compared to 116 per cent in Q1FY23. When considering a pro-forma basis, including the estimated HDFC Limited book as of June 30 in the merged entity, the LCR exceeded 120 per cent. Additionally, the bank’s capital adequacy ratio is a robust 18.9 per cent, with a CET 1 (Common Equity Tier 1) ratio of 16.2 per cent.

Looking further towards the annual financial performance of the bank on a consolidated basis, in FY23 the total revenue of the bank surged by 25.6 per cent and stood at ₹170,754 crore as compared to ₹135,936 crore in FY22 while the operating profit of the bank grew by 44 per cent and reached ₹29,932 crore as against to ₹20,795 crore in FY22. Similarly, the net profit of the bank jumped by 21 per cent and stood at ₹46,149 crore as compared to ₹38,151 crore in FY22. Moreover, the bank has been able to grow its total revenue by 12 per cent (CAGR) over the past three years and net profit has grown by 19 per cent (CAGR) for the same period. 

Furthermore, when examining the bank’s current valuation metrics, it is evident that it currently has a price-to-earnings (PE) multiple of 17.3, a price-to-book (PB) value of 2.93, and an EV/EBITDA multiple of 20.3, all of which are slightly elevated in comparison to the industry median. Moreover, the bank’s PEG ratio stands at 0.87, and its return on capital employed (ROCE) is at 6.24 per cent.

Outlook

The Indian banking sector is experiencing growth due to robust economic expansion, rising disposable incomes, increasing consumerism, and improved access to credit. The demand for both corporate and retail loans is on the rise, with key sectors driving this growth including services, real estate, consumer durables, and agriculture-related industries.

In terms of operational expenses, the bank reported ₹14,057 crore opex for the quarter, marking a 33.9 per cent increase from the previous year and a 4.4 per cent increase from the preceding quarter. Notably, the bank has expanded its network by adding 1,482 branches and 1,732 ATMs since the previous year, emphasising the importance of an extensive distribution reach for sustained funding and engagement

HDFC Bank has disclosed an excess liquidity on its balancesheet and this, coupled with narrower spreads on HDFC’s portfolio, may exert downward pressure on its margins, potentially reducing them in FY24. However, gradual utilisation of this liquidity over the next three to four quarters is expected to normalise HDFC Bank’s margin trajectory. The impact of HDFC’s narrower spreads will be offset by a lower cost-to-operating expense ratio and reduced credit costs in its mortgage book, resulting in an expected return on assets (RoA) of approximately 2.0 per cent for the merged entity after the liquidity drawdown.

There are concerns regarding potential margin compression and near-term volatility in HDFC Bank’s asset quality. Nevertheless, the bank’s healthy provision coverage provides some relief. The merger of HDFC offers substantial growth opportunities, especially considering the bank’s competitive advantage in mortgage financing and the potential for cross-selling to existing HDFC customers but we might have to see going forward how this actually works out for the bank given that there are concerns regarding the margin compression and excess liquidity. Hence, we recommend HOLD.