by Yiannis Mostrous, editor Global Investment StrategistHDFC Bank
), or HDFC,
provides direct exposure to India's economic growth story.
holding in our model portfolio, is one of India's biggest banks, with more than
1,700 branches in 833 cities, a strong deposit franchise and healthy asset
It is among the top two or three players in all consumer loan
segments (except mortgages) with a lending emphasis on small- and medium-sized
enterprises (SME) and rural banking.
Consumer loans are rebounding in
India, recently posting growth of about 30 percent. As a result, the bank should
be able to maintain its strong revenue stream.
Management believes that
it can sustain volume growth of more than 25 percent in 2011 should the Indian
economy grow by 7.5 to 8 percent. We believe this is possible.
lender's most recent quarter, HDFC's core fee-income grew by 22 percent year
over year, on the back of rising volumes of general fees at the bank's branches.
Additionally, some fee-income from corporate-related services also
contributed to growth. This service-related growth should be viewed as a
But even without this additional income stream, management said fee-income
growth would have risen by about 18 to 20 percent year over year.
bank has boosted its headcount as it's expanded its branch network. In the last
quarter, the bank recruited about 3,000 new employees in order to staff 100 new
Additional staffing needs led to rising employee
costs, but the strength of the lender's overall business should more than offset
these rising costs.
Expansions to HDFC's branch network should allow the
lender to grow its retail loan portfolio by 20 to 25 percent this fiscal
Furthermore, the lion's share of new locations is located in
non-metropolitan and under-banked regions, which has resulted in higher core
This is the result of a regulatory mandate that management has
used to attract more current and savings accounts from smaller towns. All told,
about 62 percent of HDFC's branches are outside India's nine biggest
The Indian government's new budget placed an emphasis on lending
in the agricultural sector, as the government continues to emphasize peripheral
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 government's budget for
the 2012 fiscal year (2011-2012 calendar year) calls for direct agriculture
lending to increase by around 27 percent to USD105 billion.
government subsidies to farmers for interest payments on loans in good standing
were also raised to 3 percent, substantially decreasing the effective
HDFC's healthy branch expansion and strong business will allow the
lender to keep margins at more than 4 percent, as it has done for the past five
years. Increased use of technology will steadily reduce transaction costs and
The market has always recognized HDFC's strong
growth potential. The lender's asset quality ranks high among its global peers.
Consequently, valuations for the lender have always been on the high
HDFC arguably has India's best-quality portfolios in both the
corporate and retails segments, and total provision coverage of over 100 percent
of non-performing assets. HDFC is well capitalized with a Tier 1 ratio of 12.3
HDFC is one of Asia's best-run financial institutions and
management has a strong track record of producing steady growth without
incurring excessive risk. A direct play on rising Indian domestic demand, HDFC
Bank is a buy up to $170.