On the other hand , bank is still known for its best practices of loan appraisal process in various asset classes, why cant it accelerate those segments and further slowdown the Mortgage segment until the CASAs come to a reasonable levels, that might help improve margins and valuations in the meantime..
All of this I agree with, sir. A few additional issues:
Since the bank is listed in the US, it has to follow US laws. Currently, law firms are investigating them for the differential interest rate.
Recent exit of high-level management
AT 1 bonds fiasco
These are concerning negativesā
Along with declining system-wise CASA ratio, cheap borrowing is also declining
other than that i agree with you
invested for 3 years
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A analogy I can think for this case is
You sell two products:
Apples: High profit, but spoil quickly.
Rice: Lower profit, but customers buy it every month for years.
If you stop selling rice because apples make more money today, your profits may look better this year. But over time, customers stop coming to your shop because they can buy rice elsewhere. Eventually, you lose both the rice business and the apple business.
The mortage business is sticky, customers stay for 15-20 years and in the process they might buy other wealth management funds, life insurance being in the ecosystem, hence in this case the value of the customer is much higher margin on the mortage alone.
Giving up your strongest business simply to make next yearās numbers look better. Hence, fixing the cause rather than the symptom is much better decision.
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the bank is now available at the market cap of 11.5 lakh crore, with the TTP profit of 82000 Crore,
the 5 year profit CAGR remains at 19% with stock price movement of less than 1%,
Price to book value is less than 2 at 1,92
At these matrix valuation, I see a significant margin of safety and enough opportunities for the rerating. remember as soon as the FIIs come back, HDFC at these valuation will be the first stock for them to buy
DIIs are already increasing their stake and are now more than 40% of the bank
The bank is of the size and stature, that it will find out the solution to the governance and future growth
This is now a compelling case for buy,
not yet invested, but will add now 3 to 5% of portfolio
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It would see re rating only when fii start buying aggressively or profit growth outpace loan growth which would be signal of operating leverage. As of now this is over owned by dii and retails.
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the stock currently trades at p/b of 1.9 .letās assume that it trades at a p/b of 2 (the lowest it has histrorically)for the foreseeable future and the earning remains the same for the next 5 years,this is the most bear case scenario i can think of.
the eps of the bank is 50 rs in fy 26 they gave a div of 13 rs so roughly 37 rs will get reinvested in the book value ,at p/b of 2 the stock should increase by 74 rs every year and should be giving 13 rs dividend every year.that means the stock would yield you an approx return of 11 to 12% at cmp at the bare minimum.if for some reason the stock decides to get rerated for any reason what so ever it is a bonus.
i beleive this a long term safe play where i have invested at this price as i see dowside only a big negative news play out but this bank is to big to fall so i would invest at that price as well if the news is not that bad.
disc :took a big position in the stock and not a sebi registerd advisor.
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Its contingent on the assumption that P/B of 2 is the floor for HDFC Bank..
BoB has also grown profits at similar 19% CAGR for last 10 years, but its P/B is close to 0.8 which is the same as 10 yrs back, while HDFC Bankās P/B has gone down from 4.2 to sub 2 now, still more than 2X of BoB.
SBIN, profits have given 10 yr CAGR of 21% (2% more than HDFC), its P/B though has grown from 0.9 to 1.6, is still 20% below HDFC Banksā
Many may argue that comparing Pvt Banks with PSU may not be a like comparison, but purely going by the 10Yr profit CAGR, PSUs have shown that they can compete on profits with pvt banks well, so why not..
While I also think current price of HDFC Bank should be a good price, but since you mentioned invested a big position, hence the caution that 2 maynot be the floor..
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I too have HDFC bank as one of my top holdings. The bear case scenario 1 yr ago was considered 2.5, 3 yrs ago it was 3. So if bank delievers 10% growth in book, then it may go down to 1.5. we need to remember the fact that HDFC bank is one of the poorest performing banks in the last 3 yrs whereas most banks have grown its book by 50%. We, investors, are relying on mean reversion of its performance. But mean reversion is probable but cannot be taken for granted.
LIC Housing was the darling of the market for a very long time till 2017. Then from a P/B of 4, it gradually reached 0.67 now in 9 yrs.
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i have always invested in tranches and made good swing returns in hdfc bank, past performance should not be looked as a sure shot bet but in share markets nothing is sure shot i just look at the risk to reward ratio ,true that bank p/b book can fall further but historically it has never traded at this valuation before.there is a lot of neagtivity and hurdles around hdfc due to merger and directors resigning and fraud that recently came to lime light.it is just a simple value bet of heads i win much tails i donāt lose much
i personally feel hdfc should trade at a slighly premium valuation given the fact that it has one the cleanese loan books,the best gnpa and almost the best npa is indian banking industry.
current holding of hdfc is 8% and would eagerly increase this stock up if there is some negative news and the stock fall furthers.furthermore this is a swing bet for me , i mainly invest in small and micro caps but take bets in large caps with higher allocation with margin of safety in mind.
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