All figures are approximations.
For the degenerates, TLDRs have been given at the end of each section.
An account of the Indian banking segment since 2008 has been comprehensively covered in Episode 5.
Link: [Bank Sector DD] (https://www.reddit.com/r/IndianStreetBets/comments/fo40q9/bank_sector_dd/?utm_medium=android_app&utm_source=share)
Episode 3 covered the asset quality of most of the major banks. The following hence won’t be covered in detail here.
Link: [How risky are our banks] (https://www.reddit.com/r/IndianStreetBets/comments/fkrbll/how_risky_are_our_big_banks/?utm_medium=android_app&utm_source=share)
It is recommended that you read the above articles first. So as to get a better understanding. We will also be glossing over the 2008 to 2013 period, since, again, it has been covered.
TLDR; Read the linked articles for a fun, bedtime story.
Started in 1977, the bank has gone on to become largest private bank due to its consistent growth rates over the period, great management expertise and its retail mortgage services. HDFC bank was one of the first to receive approval from the RBI in 1994. Aditya Puri has been its a vital cog in the company since its inception. The bank’s journey from its humble beginnings to a market leader has been astounding. A testament to astute management which also plays within its means. Let nobody tell you that management analysis isn’t important.
As a small, new bank, they couldn’t loan out huge chunks of cash to the big corporates, so they changed tack in the early 2000s to the retail sector. A unique characteristic which has, since, paid off handsomely. Even during years of banking crisis, HDFC has managed to maintain its asset quality and not let the NPAs get out of hand. All because the retail sector is far more unlikely to default as a group. They also usually pay off their debts on time.
Instead of corporate loans, they’ve focused on foreign remittance, transactional and cash management features. Even among the corporate sector, the focus has traditionally been on large, blue chip corporations which have a lower chance of folding. This is especially true when compared to banks with a history of lending to SMSEs. During times of recession, they are often the first to default. All of this has led to stable and consistent growth.
HDFC has also been a leader when it comes to implementing technology. They were the first bank in India to have a centralised salary payment system provided companies and their employees held accounts at theirs. Even in the stock market, automated settlement processes were first initiated by HDFC. They were also market moves in the mobile banking space, raking up market share. They are also known for their cost cutting measures.
TLDR; Good track record. Retail sector, management, prudent use of capital and use of tech major pluses.
Importance of banking in India:
Most of the population in India resides in rural areas. To connect them, India has adopted a multi-pronged approach towards financial inclusion. Multiple efforts to bring the poorer and weaker segments of the society within the fold of the formal banking system have been initiated both by the Reserve Bank and the Government. The vitality of rural banking has been recognized by the country’s planners and policy makers since independence. The performance of the banking sector is more closely linked to the economy than perhaps that of any other sector. Despite all this, as many as 15% of accounts in India were zero-balance as of January 23, 2019, according to data submitted to the Rajya Sabha by the finance ministry, though this had dropped from 25% in 2016 and 75% in 2014. Further, 84% accounts are still only “operative” – that is, they have seen at least one transaction in the last two years. All the above demonstrates that this is by no means a mature sector at its limits.
HDFC Bank still has a long way to grow. Apart from outmaneuvering its competitors, the bank could gain market share by simply expanding its reaches.
India also has the world’s fastest growing Middle class. And this entire new section of individuals will give rise to banking and lending requirements. “From 88% in 2000, the market share of Public sector banks (PSB) has reduced to 76.8%, as of 2012-13. Their market share is declining and is expected to come down to 60% by 2025. Taking the tractor financing (PSL) as a case study segment, PSBs (50% of the segment a few years ago) are now reduced to 10%. In fact, private sector banks and NBFCs have filled their shoes, accounting for 60% market share though their loan terms are lower and interest rates higher. While PSBs reported 50% NPAs in the segment, the others have negligible NPAs.” – RBI Report. This clearly states that private banks have been gaining on NBFCs and public banks. We haven’t even mentioned the unorganised lending sector yet. Millions stay get their loans through predatory moneylenders/loan sharks who charge exorbitant interest rates. With the rise in online technology, this is changing rapidly too.
TLDR; India still poor. Not everybody has a bank account. Burgeoning middle class will need services. Private banks eating into public banks, NBFCs and unorganized lending. HDFC has a long road ahead.
Porters five forces model:
Rivalry among the industry: Moderate
Many players are fighting for the same share along. There is low switching cost but the process is tedious.
Bargaining power of suppliers: Low
Bargaining power of customers: Moderate
Threat of substitutes: Moderate
Competition from the non-banking financial sector is an issue. The new products include credit unions and investment houses. One feature of using an investment house is that the fees that the investment house charges are tax deductible, whereas for a bank it is considered a personal expense, which is not tax deductible. The rate of return with using investment houses is greater than a bank. There are other substitutes as well for banks like mutual funds, stocks (shares), government securities, debentures, gold, real estate etc.
Threat of new entrants: Low
Barriers to entry in the banking industry do exist.
Valuations and other comparisons:
Do note that PB ratio is generally considered more important in the banking sector.
As on 26 March 2020
Accurate as of 26 March 2020
HDFC’s financing profit has been decreasing since March 2019. Over the last 5 years, revenue has grown at a yearly rate of 19.54%, vs industry avg of 14.88%. Similarly, market share increased from 20.51% to 25.02%. Over the same time frame, Net Income has grown at a yearly rate of 20.63%, vs industry avg of 6.17%.
TLDR; Cheaper in comparison to peers, lower volatility, great dividend yield. Market leader status.
PAT growth in this graph can be attributed almost entirely to tax reform.
NIM is the difference between interest charged on loans and interest given on deposits. The fact that it is stable is a great sign. Great growth in deposits.
Steady and continuous increase in dividends over the past few years.
First sign of trouble.
A decreasing ROC is never a good indicator. Despite all the setbacks the economy as a whole has faced since 2019.
The reach of HDFC Bank
Balance sheet and cash flow statement standouts:
Provisions and contingencies have increased to 7,550.08 CR.
Loan loss provision have also gone up. 6,394.11 as compared to 4,910.43 CR
Investments have spiked up.
Stockholders equity has dramatically increased by almost 50%.
Return on average net worth has fallen to 16.3%. The prior figures for the past three years were on average 18.1%.
**Net cash flow from financing activities have plummeted from 4841.1 cr to 1571.2 cr.
There’s a net decrease in cash and equivalents from 7396.3CR to (4156.75Cr)
TLDR; Read everything. The entire section is a TLDR.
Management: Aditya Puri is to step down as MD in October 2020, due to age limitations. A change in management, especially after a stellar individual track record should be a matter of concern. However, the candidates shortlisted for the position are all experts in their own right. Keep an eye out for Ajay Banga, current Mastercard CEO. His name has been thrown around in reports and if true, he could be what the bank needs to get rid of a little lethargy and get back to being aggressive. (Watch his interviews, he’s great.)
Covid-19: The coronavirus pandemic has been affecting all businesses, some more than others. Conventional wisdom would dictate that HDFC will get through this in better condition than it’s peers. However, if the current lockdown continues, HDFC could face the music. The curfews are putting small businesses at risk and, perhaps, pushing a part of the working population towards unpaid leave. Even wage corrections seem a possibility after InterGlobe Aviation Ltd, which operates IndiGo, announced a pay cut for its senior employees. This is bound to impact equated monthly instalments. HDFC Bank also has the highest unsecured portion (17%) of consumer loans among its rivals, and its retail bad loan ratio has been edging higher over the past five years.
Annual report: Cash flow issues. Provinces and contingencies on a rise. The rise is a precursor to increased NPAs, especially in today’s environment.
Important factors: Deterioration in asset quality on a consistent basis. Lack of growth in profitability on a sustained level. Growth in PAT has been solely due to tax cuts.
These factors, along with Aditya Puri’s imminent retirement, could give investors pause.
TLDR; Coronavirus affecting everything. Retail sector could be badly hit. Management turnover. Cash issues? Increase in NPA risk?