ValuePickr Forum

HDFC Bank- we understand your world

Trying to play the devils advocate here.

At 30 times FY 20 earnings multiple, the PE ratio seems stretched. While a consistent growth of 20% yoy would have been feasible during years of credit boom, it seems outright improbable thanks to the base effect (book going beyond 8 lakh crores requiring an asset addition of almost a lakh crore here onwards). Not sure if a valuation of 4.5 times book is justified in the face of falling GDP and rise in delinquencies (not withstanding their impeccable performance during past down cycles on a much smaller base).

In the absence of incremental credit growth from existing customers, HDFC Bank only has recourse to the following

  1. Growth through securitisation involving purchase of retail NBFC portfolio (low risk immediately considering RBI backstop till 2020)

  2. Increase in rural (NPA experience of > 1 historically) and consumer discretionary funding (retail financing where books have been pristine till date but could see rising delinquencies owing to job losses)

  3. Increase in midcorporate / SME book expected to weather the second round of delinquencies owing to slowdown in auto / infra loans.

  4. Reduce client selection criteria to BB below rated clients in the absence of too many bankable BBB- names

Any minor uptick in NPA numbers on a gross / net basis would weigh heavily on the counter. Even a downturn in credit pick up would be detrimental to valuations. The thrust on participation in retail loan melas (never seem them selling themselves so heaving in the past) and festive offers (customer acquisition by offering a 5% discount on iphones which traditionally doesn’t believe in deep discounting) comes across exercise in propping up the counters by showing a bump up in retail book.

Though this article seems to suggest all is well, wondering what prompted to leak this data selectively during the silent period. Expect some additional senior level share sales similar to the one exercised by Mr Puri recently

I would be happy to hear counter views.


In short term you analysis is fine but consider long term…

  1. GDP will pick up in 1-2 years max…

  2. Base of 8 lakh looks high, but if India were to add 2.5 trillion to GDP from here, say in 5 years… Is the base comparable???

  3. There is a huge opportunity in affordable housing… Loan rates alongwith subsidies, the projects are selling like hotcakes (in words of management)…

  4. Regarding selective leak, check bse announcements… it’s not a leak but disclosure by Bank… they had this disclosure last quarter also…

The management of HDFC is clean… they don’t indulge in leaks to sell shares…

  1. Regarding discounts also, the management (Mr Aditya Puri) has already clarified that they are not sacrificing margins…

Disc: minor holdings


In the current financial climate, the one who can raise funds at low cost will be the king.

Yes Bank has no growth fund. SBI have NPA issues to prioritise. In NBFC space, likes of DHFL, Edelweiss , L&T finance are struggling with NPA, survival & lack of funds. Then we have a HDFC twins who have no such issues. HDFC AMC is growing at expense of other competitors. Same holds true for HDFC Bank & HDFC.

Inspite of the hefty valuations, HDFC group as a whole, is in a sweet spot where , even in a tough economical climate, they have everything aligned well for growth…growth from getting market shares of its competitors.


Thanks for starting this
I will try to put my views in simple way

In any economic crises the stronger players always get benefited as they gain market share due to better balance sheet and past prudent lending and competitors are in distressed

Now two important point I like to highlight which really affect the valuation

1 Market share of HDFC Bank in total indian bank advances , it’s only 8.58% …so opportunity size is still big even after 24 years of business and at 6.5 lack CR market cap

  1. Reinvestment Rate what I realised that for successful compunding business opportunity should be large scope for reinvestment should be there, HDFC Bank has roughly 81% reinvestment Rate

  2. Intangible assets. That’s where HDFC culture comes to play like Lending discipline and Focus on profitable growth (not just growing) and Brand building

Now if you think that why I am not worried about few quarters slow down …(I feel there maybe opportunity) Probably I am bias
Because I hold HDFC Bank since ipo of 1995 and given me roughly 26 to 27% CAGR
I hold Kotak Mahindra Bank since IPO which has given me around 30% CAGR

I try to value banking by ROE ROA and cost to income ratio ,CASA … I know it’s shortcut valuation so I try to read more and more about how to value banking

Ending with Buffet Quote

The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine,”



All information copy paste from Goldman Sachs report on HDFC Bank . September 19

All credit to Goldman Sachs’s
Rahul jain , Abhijeet sakhare , Mayank Bukhrediwala

How they will penetrate in rural area and why rural market is important for them

How important are the rural regions to HDBK

The agriculture/rural/semi-urban-focused loan book is c.16-18% of HDBK’s loan book – one of the largest portfolios within Pvt banks – at c.US$20bn, as of FY19.

The bank has seen an increase in delinquencies in crop loans as well certain products that are exposed to rural/semi-urban areas.

The tier-2/-3 centers have been a big focus area for HDBK over the last few years.

The bank has acquired up to 19% of incremental market share in rural communities.

Given that HDBK is acquiring significant market share in tier-2/-3 geographies and with larger markets saturating in terms of further market-share gains, rural/semi-urban is increasingly becoming critical for the bank, particularly from an expanding customer-acquisition standpoint.

For that they r doing this

CSCs – a low-cost, customer-acquisition model; potential to add c.8-28% to its retail loan book

Common service centers (CSC) provide approximately 250 different types of central/state government services in rural/semi-urban centers and are allowed to be a banking facilitator.

HDBK provides basic banking facilities in 32,000 of these CSCs so far, and plans to expand the number to over 100,000 centers. With about 300 footfalls per day, a village level entrepreneur (VLE) is able to earn about Rs30,000 from offering government services and that can potentially increase to Rs50,000 per month by distributing financial services. The asset-side opportunity is larger for VLEs due to under-penetration and higher incentives in rural regions

A VLE can potentially source one car loan per month, one 2-wheeler and personal loan per week and five microloans per month
Based on a simple assumption considering similar productivity at the pan India level with 32,000 VLEs, could potentially translate to Rs350-400bn (US$5-5.7bn) of annual disbursements over near-term and Rs1.1-1.2tn (US$16-18bn) over the medium-term, in our view. Commissions are close to Rs3,000 for a car loan, Rs800 for a 2W, and similar payouts for other products such as personal loans and microfinance loans.

The VLE that we visited had already opened 100 SA accounts and a few asset cases within 2 months of being operational with HDBK with nearly all accounts having reasonable balances. HDBK has nearly 40% deposit market share in that catchment area, as per on-the-ground feedback.

Key challenges for HDBK: (1) scaling up this business by signing on more VLEs; (2) the quality of customer acquisition; (3) maintaining the right incentive structure so that the VLEs are motivated to sell HDBK’s products; and (4) ensuring regular transactions and increasing cross-sell. The bank has been constantly providing training to the VLEs.
The variable cost nature of this model mitigates these risks for the bank, in our view.
Risks from competition:
While HDBK’s arrangement with a VLE is not exclusive, system integration and the bank’s strong processes and execution strength, alongwith ability to underwrite and turn around a wide array of products, will likely provide a much better user experience. This should help VLEs to earn better commissions through better volumes, even if a new entrant were to offer a higher commission rate.



The OP talks about HDFC bank’s large base (book going beyond 8 lakh crore) and the challenge of growing 20% YoY. This needs to be put in the context of the banking sector growth and the growth of its peers.

Here is India’s credit growth (YoY growth % numbers for each month, plotted from Mar 2000 to July 2019):

For the past 3 months, the number hovers around 10%. Some very well known investor (I don’t remember the name, I think it was Warren Buffet or Peter Lynch. Not sure.) had said that banking sector grows at a rate of 2x the GDP growth rate. As you can see from the data, this holds true for the Indian context.

Assuming GDP growth comes back to 7%-8%, the credit will grow at around 15%. Better managed banks/NBFCs will grow higher than the industry, poorly managed ones will grow at a lower rate or degrow. With these assumptions it seems plausible that HDFC Bank will grow at 20%.



“HDB Financial Services (HDBFS)” IPO is value add to existing stakeholders of HDFC Bank?

I remain bullish on HDFC Bank relative to the overall markets.

Main reasons being

  1. Shrinkage of supply side of the equation. In a scenario where competition is having problems and a lot of competitors are going out of business, hdfc bank has got strong booster dose of tax cuts. Indiscriminate lending by players like yes bank, various other nbfcs etc has caused problems in the whole system and due to the individual problems and collateral damage these institutions suffer a lot of them will find it difficult to get funds to grow their loan books. That leaves the field wide open for the well run high quality banks to grow faster and in a more healthier business environment. A marker of this phenomenon is available by having a look at the newspaper ads posted by hdfc bank and the aggressive stance adopted by the bank to grow its lending.

  2. The tax cuts straightaway raises the earnings estimates by 10% as the bank used to pay close to 35% taxes and now gets max benefits out of tax cuts. This additional profits are the funds the bank gets to redeploy at higher rates of return. Its a win win situation for the bank.

  3. Looking at the CASA, deposit growth of HDFC Bank it will not have any shortage of funds if it wants to grow. Another aspect of the current crisis in confidence in banking sector is a lot of depositors will try to shift to banks they perceive safer and hence there would be a flight to quality and hdfc bank stands to benefit.

  4. HDB listing can add some value to the bank’s valuation though it should only be considered an optionality at present.

In most crises, the strong players emerge even stronger post the crisis. I think hdfc bank will be heading towards better times going ahead. If the economy recovers in near to medium term, that will be icing on the cake.

The obvious risk to the whole story is collapse of economy and credit growth.


It will be hard to imagine banks like HDFC not becoming global leaders 20 years from now. They can easily break into league of global banks which are struggling with their own problems. I believe Indian banks are more capable, process oriented , agile and supported by big balance sheets they can carve out new growth eras on their own. Disc: Largest holding in my pf

Untitled document.pdf (21.1 KB)

This is 7th October PE/ROE/ROA/CASA comparisons of various banks

If someone looking at PE , ICICI Bank, and Axis Bank are far more expensive than HDFC Bank

If you Focus on CASA HDFC Bank looks lagging behind but what I think they are not attracting new clients by giving more % of interest in savings account , it’s always tempting to do it but clients will be more sticky


Hi, wish to toss thought and to have opinion of all valued from member on the topic HDFC Bank growth prospect. I would to say the bank serves retail loan or consumer finance. In the recent scenario in the festive season just saw Clash to Titans - HDFC Bank Vs Bajaj Finance, considering case who will emerge winner…is Bajaj Finances’ micro/mini top-up loans with advance risk management and analytics or HDFC Bank aggressive drive to winner at-all-cost approach. As cost borrowing of HDFC Bank is not be cheaper than of Bajaj Finance and GOI deficient finances will issue Bonds after Corp. tax cuts…who will be winner…


Others have covered almost every point. Your point on valuation of 30 PE on FY20 is not correct. HDFC Bank made 22,332 cr consolidated profit in FY19. If we assume conservative 18% growth, FY20 PAT will come to 26,350 cr. Being a full tax paying company, new tax rate straightaway increases earnings by 15%. So 30,300 cr profit in FY20.At today’s market cap of 656,000 cr, FY20 PE comes to 21.65 far cry from 30 PE.

Add this to everything else discussed in the thread, it’s a buy even now in my opinion.

Disc - Second largest holding in portfolio. So my views are biased.


Read this tweet and articles in the tweet. Should answer some of the questions

Difficult to answer even promoters don’t know

Just look at video where Aditya puri is starting new campaign Festive Treat
His speech starts from 5th minute onwards and
See how they are Changing business model and applauding team for building business touch by touch
Worth listening , I think constantly adjusting to changes is key to success



A thread notes on HDFC bank saved from twitter couldn’t find source now

1/ Most folks see HDFC Bank as a bank and analyse it as such; I see a fee generating machine which also runs a bank. A thread on why I made this a decent position some months back despite what appears to be a rich valuation

2/ Over the last 10y the Bank has grown its other income from 3.7k cr to 15.2k cr (CAGR 17%). This includes fees commissions (~75% mix in FY18) , forex & derivative revenue, etc. So large was the other income that 1136 cr was booked under “Miscellaneous”.

3/ To put that in perspective the Banks “miscellaneous” income of 1136 cr is a respectable PAT for a large cap, and a respectable market cap for a small cap co.

4/ The cost for this income is marginal / negligible being incidental to the lending business. I doubt the outer limit cost for generating this fee will be more than 500 cr. It can be safe to say that fee income contributes 50%+ of the Banks PBT

5/ So if fee income growth matches your ROE, all you need to do is not screw up on your lending. That is relatively easy since you cherry pick borrowers with CIBIL score of 750+. Hence its likely that fee income drives the strategy rather than being like cream on the cake

6/ So where does this fee come from? Large part from cash management for corporate supply chains (incl vendors, distributors, dealers). HDFC is a leader in the space. Once you have your vendors and distributors on the system moving banks is not easy, its impossible. Strong moat!

7/ So when payments are processed, the money doesn’t leave the bank, even better it’s a float for a day, on which the bank pays no interest, in fact gets a fee! More transactions, more float, lesser cost of funds and more fee

8/ Then, it’s the largest collector of direct and indirect taxes with 22% share. This also contributes to float. As tax collections rise the Bank will benefit even more. This is probably the most direct play you can have on unorganised to organised

9/ Beginning with NSE when it started, HDFC is also a large player in clearing services for stock and commodity exchanges. Again as direct a play as possible on higher equity participation in India and a deepening commodity market

10/ Another good part of other income (~12-15%) is distribution of financial products – home loans to HDFC Ltd, MF to HDFC AMC, insurance to HDFC Life/ Ergo, etc and to their competitors also

11/ Unlike other banks treasury income / assets is lowest, implying they are very conservative on treasury.

12/ All this makes me quite comfortable that fee income will continue to grow at 18% if not higher. It is like a positive feedback loop. The more it grows, the stronger it becomes. Given the trends on tax compliance, unorg to org, insurance pen., the runway is really long

13/ This strength allows HDFC to select the best credits. It doesn’t need to run behind lower CIBIL scores. Its an added strength that the Bank is nimble, smells a troubled loan from afar.

14/ Long before fintech crawlers the bank kept a hawk eye on account balances and inflows. Then if your vendors and distributors are also on the system you can tell if something is wrong months before it becomes a sticky issue.

15/ In conclusion, I think (my view, feel free to differ) the Bank is a better risk adjusted alternative to most of the other derivative stories on India’s growth. The retail service sucks most of the time, but that is a small part of the larger story (end)

And the crown jewel asset - hdb financial !


Really done beautiful work


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HDFC Bank is also using its dominant position in cards to become a e-commerce aggregator.

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This is actually very tempting for a consumer. 10x reward points on Amazon, Flipkart, Flights, Redbus, Hotels, Swiggy you name it.

And there is ZERO fee on train tickets.

I have switched almost completely from my older credit cards to HDFC Bank Credit card.


HDB financial services results

Unaudited HY Financial results -30.09.2019.pdf (71.6 KB

On expense side there is increased in
Impairment on financial instrument

Let’s see how Bank perform
Thanks @hitesh2710 bhai edited


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