HDFC Bank- we understand your world

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.

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