Re: {LONGTERMINVESTORS} HDFC Bank: thread

[RAJESH DESAI]

• HDFC Bank Q1 net up 30.6% to Rs 1417 cr 

On Fri, Jun 29, 2012 at 6:12 PM, RAJESH DESAI <stock...@gmail.com> wrote:

How Aditya Puri has managed to pull off 30% plus growth for HDFC Bank

Sitting in the boardroom in the sixth-floor office of HDFC Bank headquarters, Aditya Puri lets us in on an inside secret. The CEO of HDFC Bank confesses, "By the time everyone walks into the office, I am already upset." Now that sounds a bit strange.

The bank he runs doesn't have ICICI Bank's aggressive ambition, Axis Bank's momentum or even State Bank of India's problems in aviation to stir things up. Even during the exciting results season, he follows his self-confessed 'boring' credo to the T, posting similar results every quarter. So what could possibly set Puri off ? Well, it could be one of the many things he constantly has on his plate: a delay in project somewhere, cost overruns, fluctuating service levels. "Don't get fooled by my designation. I look into 500 things at a time. Nothing moves here without my consent," he says.

It seems he has taken a leaf out of Ram Charan and Larry Bossidy's book Execution, which says excellence is about two things: doing the same thing over and over again every Monday morning and following through incessantly. But as a corollary, Puri has managed to create a world-class Indian bank in 18 years. How has he managed it? "If GDP grows at 8%, the banking system will grow at 20%, which is a multiplier of two and a half," says Puri.

"When the growth rate is higher, we gain higher market share. So if you have 8% growth rate, our growth rate normally is five or six per cent more than the system," he explains, with a Cheshire Cat smile. The answer is not as simplistic as Puri makes it sound. So then how has HDFC managed to outperform its peers through difficult times?

Before we go to the how, a look at the numbers will give a sense of bank's growth. HDFC Bank's customer base currently stands at 25 million, having grown at 35 % CAGR since 2001. The branch network stands at 2544, having added 819 branches in the last two years. The real story, however, is not just growth but the "quality of growth".

The superior quality of its funding franchisee - currents and savings account (CASA) at 48% - provides the bank a sticky and low-cost source of funding. And just how good that is can be gauged from the fact that compared to its peer group average of 36%, the bank has maintained an average CASA ratio of 56% over last seven years. And what a high CASA does is give the bank, a Net Interest Margin (NIM) of 4.2%, a good profitability number for any bank. Take a look at another key metric, a quality asset mix: the gross NPAs are just over 1% and have been actually declining in the last 10 quarters.

GO TO MARKET

Given that demand was abundant in underbanked India, the way HDFC positioned itself to take advantage of that demand is a case study. Though it did not have the products of the multinational banks and the reach of the public sector banks, the Bank's growth story is a story of continuous evolution and keeping a conservative approach.

The bank did not expand too aggressively in a product without building appropriate capabilities. However, it did not lag on growth or market share gains either. "A conservative approach, in the context of HDFC Bank, means the bank did not compromise on margins and asset quality risks and has waited for the right opportunities." says Sameer Lumba, Managing Director & CEO, JM Financial Institutional Securities.

During the first decade, the focus was on urban centres, but today semi-urban and rural areas generate a large chunk. "Some 4-5 years back, 80% of their income came from the top 15 cities, today 40% comes from semi urban and rural areas. That's an amazing strategic shift," says Nandan Savnal, an ex-banker and a keen industry watcher. Granular planning has allowed the bank to stagger investment in a way that present performance doesn't suffer while the future growth drivers are also being put in place.

"We plan our growth across three horizons: one that I can see in front of me; second, what I can see in front of me but will become a big business five years from now; third, at the bottom of the pyramid, which will become a big business, maybe five years from now," says Puri. Today, nearly 35% of the branches will be making a loss because it takes 20-24 months before a branch breaks even. But that's growth in 2014. The bank has also snatched market share from its competitors. For example, HDFC Bank's retail loans as a percentage of system retail loans, have increased 7.2 (Dec'07) to 13.2 (March'12).


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CA. Rajesh Desai

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CA. Rajesh Desai

[Rajesh Desai]

HDFC Bank sees 15-30% higher home loan offtake next year

March 08, 2013

After the Union Budget announced additional sops for first time home loan borrowers, HDFC Bank has been seeing many enquiries about the product in Karnataka.

“Home loan enquiries have gone up after the Union Budget announcements. The conversions typically take 30-45 days from enquiry,” said DhirajRelli, senior executive vice president branch banking head – south, HDFC Bank.

He expects, for the first time, home loan borrowers may help increase loan offtake by 15-30% in the next financial year. Though the ticket size may not be high as home prices in the state and in Bangalore are lower than in Mumbai or Delhi.

The Finance Minister has allowed an additional Rs 1 lakh tax benefit for first time home loan seekers borrowing up to Rs 25 lakh in financial year 2013-14. This is over and above the Rs 1.50 lakh tax benefit for interest repayment home loan borrowers get.

The bank offered loan against property scheme has seen a higher demand in the past year with 20% growth on a year-on-year basis. The bank has seen more numbers of customers interested in financial planning and as part of that investing in equity mutual fund schemes by way of systematic investment plans (SIPs), though Relli did not quantify the increase.

This was on the sidelines of a press conference to announce opening 150 branches of the second largest private sector bank in the state. Of which 70 branches are in metropolitan cities, 29 in urban areas, 40 in semi-urban and 11 in rural areas. The bank opened its 150th branch in Karnataka’s Dakshina Kannada district’s town of Sullia today.

Relli said, “In the next financial year, the bank would like to increase the number of branches to 200 in the state, with at least 20 more branches for rural and semi-urban areas.” He added that term insurance and general insurance products for businesses have seen good demand in the rural areas specially from women self-help groups.

HDFC Bank has branches in all districts in Karnataka except Chamrajnagar and Kolar, the bank expects to set up branches in these two districts by next quarter. Close to 10% of HDFC Bank's automated teller machines (ATMs) are in Karnataka, Relli added.


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CA. Rajesh Desai

[Rajesh Desai]

Conference Call highlights: MOSL

-       In 1QFY14, 55% of GNPA came from retail and 45% from corporate segment. Within retail, CV/CVE segment continues to be under stress where delinquencies have increased on a sequential basis, although remains at a similar level of Dec-12. SME portfolio continues to behave well and incremental delinquency is below the average trend seen earlier.

-       On a daily average basis, differential between CASA ratio at end of 1QFY14 and FY13 was very low as compared to decline of 270bp QoQ on a reported basis. Some part of the SA deposits was on account of government and semi-government deposits which came-off during the quarter, apart from which core SA deposit growth was healthy.

-       Based on behavioral pattern of SA Deposits, 80% are classified in 1-3 year deposits bucket as per ALM reporting.

-       Funding cost and yields have come off by 10bp each in 1QFY14. Management does not expect further decline in short term rates in near term. Large part of the corporate portfolio is short-term or working capital financing, which could help bank to compensate any increase in cost of funds in 6-9 months. Further, 20-25% of the book is linked to base rate.

-       Bank has negligible amount of wholesale deposits and does not borrow under MSF. It utilizes LAF only to tap arbitrage opportunities.

-       Higher CD ratio is also on account of float which comes under other liabilities, higher Tier II Capital and international book (funded via. borrowing largely), adjusted for which CD ratio would have been ~76%.

-       Within fee income stream, third party products contribution continues to decline led by pressure on commission as well as volume.

-       RWA at end of the quarter stood at INR3.25t (+6% QoQ).

-       About 40-45% of the credit card portfolio would be interest paying, whereas others would largely be just transactional.

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CA. Rajesh Desai

[Rajesh Desai]

HDFC Bank: Buy

Radhika Merwin

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Strong retail focus, healthy return ratios and steady asset quality lend comfort.

August 24, 2013:  

Banking stocks have been badly hit in recent weeks. While the RBI has been busy containing the fall in rupee, the banking stocks have yo-yoed; plunging at every bad news and crawling their way back at small respites.

The series of liquidity control measures taken by the central bank has led to increase in short-term borrowing cost for banks.

Also, it has stretched the cash cycle of corporates and increased the risk of loan defaults for banks.

In such times, it is advisable to stick with banks that have a strong retail focus, healthy return ratios, sufficient capital cushion and minimal bad loans. HDFC Bank is one of the few private banks that score well on all these parameters.

It continued to outpace the industry even in the June quarter. This, along with steady margins, and a very low loan delinquency, justifies its valuation premium over peers.

At the current price of Rs 607, the stock trades at 3.1 times its one-year forward book value, below its long-term historical average of 3.4 times.

The stock was trading close to four times its one-year forward book value three months back. The recent correction in price offers a good buying opportunity for investors with a two-to-three year horizon.

Diversified business

HDFC Bank has consistently outperformed the industry, its loan book growing close to 6-10 per cent higher than the overall loan growth in the banking sector.

Its annual loan growth over the last five years has been a healthy 30 per cent. In spite of loan growth for the entire banking sector slowing to 14 per cent, HDFC Bank delivered a steady performance in the June quarter, with its loan book growing 21 per cent

The bank has been able to deliver steady growth due to its well-diversified loan book, split equally between retail and wholesale. Within retail, the bank caters to a host of segments — from auto loans to business banking. A

well-diversified business provides a hedge to the bank from weakness in some segments. Currently, lending to the auto segment has been weak due to slowdown in the sector.

On the other hand, home loans, business banking, personal loans and credit cards continue to grow faster.

In the June quarter, these segments aided the bank’s retail loan growth of 25 per cent.

Within wholesale loans, the portfolio is well spread among varied industries and businesses.

A large portion of the bank’s lending relates to short and medium tenure working capital and trade financing. So, it has not been much impacted by the slowdown in credit demand from corporates for their capital investments.

Lesser dependence on project finance has aided growth, as consumption spending remains resilient. Wholesale lending in the June quarter grew at 16 per cent over the previous year.

Room to manoeuvre

After the slew of liquidity tightening measures announced by the RBI in July, HDFC Bank was among the first to raise deposit rates across different maturities by 75-100 basis points.

However, the bank has also raised its base rate against which all loans are benchmarked, by 20 basis points recently to 9.8 per cent. Before the hike, HDFC Bank had the lowest base rate (lower than SBI at 9.7 per cent).

Even now, the bank has the lowest base rate among all private banks. Both ICICI Bank and Axis Bank also raised their base rates to 10 and 10.25 per cent.

Thus, HDFC Bank still has headroom to increase lending rates to safeguard its margins. As the cost of funds has increased for banks after the RBI’s measures, this flexibility to re-price loans will hold the bank in good stead. .

HDFC Bank has been able to deliver industry leading net interest margin at 4.6 per cent.

With healthy low-cost current account savings deposits ratio of 45 per cent, the bank should continue to maintain margins.

Strong asset quality

A big concern ailing the banking sector is the rising pace of bad loans. HDFC Bank has been able to maintain a very low level of non-performing assets (NPA).

While the June ending quarter did see some stress in the retail and corporate loans, the net non-performing assets are just 0.3 per cent of loans, amongst the lowest within the private banks.

The bank’s total capital adequacy ratio, as of the June ending quarter, stood at 15.5 per cent, well above the regulatory requirement of 9 per cent.

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CA. Rajesh Desai

[Rajesh Desai]

Aditya Puri, MD and CEO, HDFC Bank  is hopeful that the bank is likely to maintain its margins in the range of 4.2-4.5 percent. However, cautions of minor impact on margin, which would be made up in the rest of the year. Speaking to CNBC-TV18’s Latha Venkatesh, he said that the private sector expects its growth to continue given the fact that it does not have any loan growth pressures. "Our NPLs range in 1-1.2 percent, that remains intact and we have a substantial operating leverage, because we have gone into rural India and opened almost 45 percent of our branches there in the last two years and taken our entire product range there. So, we are absolutely confident of growth," he elaborated.  Meanwhile, he expects the 10-year bond yields to settle in between 8.4-8.6 percent range, because the RBI will focus primarily on controlling inflation and that has to be built into the pricing. Below is the verbatim transcript of Aditya Puri's interview on CNBC-TV18. Q: How much points will you give first monetary policy statement on a scale of 10? A: I will be a nut not to give a 10. Q: What does it mean basically to a bank? Does it mean a higher cost of money because repo rate has gone up? A: The difference from where I can see your question is coming from and the way I look at it. I look at it over a period of time. So, I would rather define where I see the policy taking me and the economy than just saying what happens to this repo rate because that rate can also change depending upon the state of the economy. I am very happy with the policy for two reasons. One, it clearly sets out the basis on which policy will be decided and what is the end result. So inflation is important, growth is important and the rupee stability is important. It also says that whatever measures were taken in July to stem the movement of the rupee based on favourable trends continuing will be unwound. The disruption came with the July measures. First thing he has done is on the short tenor 75 basis points down, this will bring the call rate down, the certificate of deposit (CD) is already down to 9.5 percent, it will bring the CD rate further down. It will bring the rates in terms of bulk deposits down which is a large proportion, it won't happen overnight, so don’t ask me when will you lower your base rate because there is an issue in transmission. He had clarified that liquidity will also come as the foreign currency non-residential (FCNR) deposits keep coming in and the regular monetary policy will be restored once he has confidence in terms of the actual functioning of the economy. So, I don’t think we could have asked for more. Q: What do you think the cost of money will look like? Is it likely to inch up or lower? A: In the short run it will inch up a bit. In a six month horizon, it will go down. Q: What has been your response in your bank to the FCNR (B) product? Is it a decent response and do you see it increasing by November? A: Yes, absolutely. Any product that we introduce is four days old. It takes a while for it to gather momentum. But this is the best opportunity NRIs are going to get in their life. Where the hell can you take almost a country risk or a bank risk and depending upon the number of times they leverage you get between 16 and 18 percent. So, there will be lot of money coming in there. 1 2 3 Watch Video

Read more at: http://www.moneycontrol.com/news/business/confidentgrowth-see-margins42-45-range_953632.html?utm_source=ref_article

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CA. Rajesh Desai

[Rajesh Desai]

DFC Bank managed to beat Street expectations once again. During the quarter ended September, it reported a net profit of Rs 1,982 crore ahead of Street's consensus estimates of Rs 1,964 crore. This would come as a positive surprise to investors prepared for worse, given several headwinds the bank faces: Low credit growth, tight liquidity, rising interest rate, falling GDP growth and pressure on assets. At 27 per year-on-year growth, earning growth was lowest in nearly a decade and below its historical trend growth of 30 per cent or more. The trajectory suggests earning growth could fall further if the macroeconomic environment remains challenging.

The stock market reacted negatively to the news. The stock closed the day down 2.4 per cent from the previous close, with most of the fall occurring after the results were announced. The market is concerned about the way the bank managed to beat street expectations on earnings. “Net profit was achieved through a control on operational expenses and lower provisions for bad assets rather than faster growth in core earnings such as interest or fee income,” says Dhananjay Sinha, co-head institutional equity at Emkay Global Financial Services.

The net interest income was lower than Street estimates. It reported a net interest income of Rs 4,476 crore, up by 20 per cent from a year ago, lower than the consensus estimates of Rs 4,570 crore. It limited its impact on earnings keeping a tight control on operational expenses, specially the employee cost. The salary bill grew 7.6 per cent year-on-year, its lowest pace in 15 quarters. This compares favourably with 16 per growth in its balance sheet (sum of loan and deposit growth) and 15 per cent growth in loan book. This lowered the expense ratio and aided margins. Analysts expect the trend to persist, given the organisational flexibility. At the peak of the global financial crisis in 2008-09, the bank had cut its employee expenses.

The provisioining coverage ratio (PCR) for bad assets declined 80 basis points on a sequential basis to 73.9 per cent. A year before, it was 81.9 per cent. According to estimates by Emkay Global, the net profit would have been lower Rs 43 core and earnings growth would have been 24 per cent (against 27 per cent) if the bank had maintained the ratio at last year’s level.

Part of this decline in PCR is explained by mark-to-market losses in its bond portfolio in the last quarter. The banks also took advantage of the new Reserve Bank of India regulations and transferred a part of its treasury portfolio to held to maturity (HTM) from available for sell. This will limit the MTM losses and aid earnings.    

“HDFC bank earnings may decelerate a bit but it will still manage to outgrow the industry. The stock has corrected in anticipation and I don’t expect to foresee any further downside at current level,” says Devang Mehta, senior vice-president and head, equity sales, Anand Rathi Financial Services.

Others are advising investors to accumulate the stock, given the reasonable valuations and the upside potential in the medium- to long-term. “The bank has a strong balance sheet and is well-capitalided. This will enable it to continue to grab market share from rivals, specially public sector banks. This is a great long-term story for investors,” says Sinha.

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CA. Rajesh Desai