India's economy may be slowing after a decade of hyper growth,
but at 5% to 6% it's still expanding at a faster pace than the
And if you're a bank in India, there's the potential to tap
millions of people who still don't use banks.
HDFC Bank (
) is trying to do something about it, at least for the growing
numbers who can afford a bank account.
As part of an aggressive expansion program across the country,
it's opened 1,000 bank branches, many in rural areas.
At last count, it boasted 2,620 branches and 10,300 ATMs in
1,450 cities with a customer base of more than 25 million. Some
500 opened in the last year alone.
Mumbai-based HDFC Bank is the second-largest
non-government-controlled bank in India afterICICI Bank (
). ICICI also has operations outside India.
"ICICI is much larger than HDFC, but on the other hand HDFC is
a pure-play Indian bank," said Morningstar analyst Maclovio Pina
HDFC Bank is also more profitable than ICICI and the bigger
government-controlled banks, such as State Bank of India, Pina
HDFC Bank's credit and funding costs are much lower, which
means returns are higher.
Revenue and profits have been growing in double digits thanks
in part to new deposits and new loans on everything from cars to
home mortgages, credit cards and gold.
In the company's second fiscal quarter ending in September,
net revenue in Indian rupees rose 22.2% while net profit jumped
In the U.S., HDFC Bank shares are traded in American
depositary receipts. They've jumped 37% since June, last trading
In U.S. dollars in Q2, revenue rose 16% to $1.9 billion while
profit jumped 19% to 37 cents a share.
According to a forecast from Thomson Reuters, profit in the
full fiscal year ending in March will total $1.64 a share and
rise 27% the next year to $2.09.
In Q2, the bank's low-cost deposit base rose 18.8% from the
year-ago period. But branch-expansion costs helped push operating
costs up 23%. If branch expansion is the primary driver of the
bank's growth, India's economic growth is a secondary factor,
"It means companies and individuals need more loans and more
bank products," he said.
Pina compares HDFC Bank toWells Fargo (
) in the U.S. for a few reasons. They are both focused on retail
banking, have a wide reach in their respective countries and good
Morgan Stanley's research team in Asia-Pacific calls HDFC Bank
their "preferred stock in India."
They expect earnings growth of 25% to 30% over the next two
years and return on equity in excess of 20% the next five
"For banks, three things matter: profitability, growth and
balance sheet," the analysts wrote. "HDFC Bank tops across
HDFC Bank's net interest margin -- the difference between
funding costs on, say, deposits, and the money it makes on
interest-earning loans and investments -- is typically above 4%,
higher than its peers.
In the last quarter, net interest margin was 4.2%. ICICI's is
usually 2% to 3%, Pina says.
The bank's good underwriting policies are evident in the low
number of nonperforming loans, which now make up just 1% of its
total loan portfolio vs. 3.5% for ICICI, Pina adds.
HDFC Bank's nonperforming loans hit a high of 2.2% in
mid-2009, during the economic downturn. Pina says the bank has
been "out of the woods" for more than a year.
Two-thirds of its revenue comes from net interest income. The
rest is from noninterest income, mostly fees on such things as
deposits and credit cards and cash-management services. Fee
income, Pina points out, reduces the bank's reliance on
Its customer base has been split evenly between retail banking
and wholesale or corporate banking.
However, in the last quarter, the split was 53% to 47% in
favor of retail banking. Growth was stronger in that segment as
consumer demand for gold, credit cards and other types of loans
The firm has been gaining market share in retail loans,
HDFC Bank was formed in 1994, an offspring of the Housing
Development Finance Corp. It was one of the first private-sector
banks to be approved under India's newly liberalized banking
Chief Executive Aditya Puri, who previously headed Citibank
Malaysia, has led the bank since its inception. He is known as a
cautious banker, a stickler for keeping costs down and for his
mantra of 30% profit growth.
He won't "bet the bank on anything," he told the Economic
Times in India earlier this year. "If we don't understand
anything, we don't enter that space."
"In category after category where the bank is a leader --
personal loans, gold loans, microfinance, two-wheelers, crop
loans -- it's been the same, deliberate process," the newspaper
After being a late entrant in credit cards, the bank is a
market leader with 36% market share, according to the Economic
Morgan Stanley notes that the bank's credit card loans grew
more than 40% in Q2 but still accounts for just 4% of its loan