Can average PE still be looked upto even after the base has grown so much?
I feel the street might be estimating asset quality to deteriorate slightly in the upcoming quarters so they have started to discount private banks. But hey Banks are back to their ATH again probably because of RBI’s proactive moves.
I have been reading posts regarding the HDFC base or market cap being so huge that it can’t grow further. One question comes to my mind, what’s stopping HDFC from growing, market cap is just a number. India’s population is 1.4B and a bank account is a must in today’s world, do you really think 1.4B people have a bank account in India, I don’t think so. Plus, nowadays people keep more than one bank account. HDFC Bank is the private sector leader, people always prefer the leader even in our day-to-day life if it’s not damn expensive.
After the merger, HDFC Bank provides everything in one place i.e. Demat, Home Loan, Vehicle Loan, Personal Loan, Saving Account, etc.
India is still a growing country, we are damn far away from the “developed country” tag. I don’t understand the economy well but one thing is for sure the finance sector will be the most beneficial sector in a growing country.
I’m not sure what exactly is deteriorating but it’s a life cycle of all companies I don’t think that should be a concern.
In the end, it’s all about with whom you are comparing HDFC Bank
Dis: Heavily invested (> 10%) through MFs (Index Fund + Parag Parikh Flexi Cap Fund)
Well, they have. as per RBI, 98.3+% of the population now have a bank account due to PMJDY and the India stack requirements.
Could you please share the source of this info?
This is from 2017-18, at 80%; you will find news reports with varying numbers but it has crossed 90% which is why fintech firms are the rage now. Also UPI numbers.
Remember there will be some population that will never have a bank account given poverty levels, which I would peg at 100M. Looks big but on 1.4B population, that’s spread across such a large geographical area, pretty much that’s all we can do.
Think about the rising income level of Indians which contributes to the deposits. Spending/Premiumization, need to buy homes etc will be more as the income grows. So banks will continue to rise.
In future if more profit can be used for buybacks etc then share price will be automatically taken care.
We have to take this with a pinch of salt. The average age of Indian population is still below 40 and if very house hold is a 3 to 4 member family, most kids definitely will not have a bank account
Secondly most Jandhan accounts will have zero money and they will queue immediately to withdraw anything deposited through various government schemes
CASA and the average money per account can be a good metric
As the standard of living and per capita increases this will naturally go up
@sivaram, thanks, I was not aware of this percentage. But as other friends mentioned it won’t impact much, we still have more space to grow like growing population and other products of HDFC Bank + people literally keep more than 1 account. I have 3 bank accounts.
I would like to highlight one thing, a lot of the accounts were only created just to activate UPI txn like Paytm payment bank. Most of these accounts literally don’t deserve savings account tag.
As per latest report in many news papers, more than 20% to 25% Jan Dhan accounts are non operational. Probably those were opened some time back but never used.
I personally believe that, there is huge population growth which will happen in next few decades, and more population will need to still open Bank accounts. With per Capita income in India at 2500 USD (number looks inflated to me!) as per some recent news, there is immense scope that this will slowly go up as well.
HDFC Bank may surprise all of us by growing at reasonable rate for another 10 years, and with Valuations moving toward its Mean which is above 4.0 P/B, there is enough scope for the stock to grow.
Companies which are 10-15 Lakh crore in Market Cap today can still become 2-3 baggers going forward, if the economy grows from current levels to about 10-15 Trillion Dollars. Our large caps are equivalent to Mid Caps of USA / China, so I do not think that, Large caps can not grow.
Many large caps have still potential to become Mega large caps.
Disclosure Holding HDFC Bank since 2011. Booked profits from time to time but planning to hold for more time. My views may be biased.
I have attempted to estimate Stock Price of HDFC Bank after 5 years, based on my analysis.
Since I am holding HDFC Bank since 2011, I believe that, Bank can still grow its book value by around 10 to 12% conservatively.
If Market rewards the bank after 5 years by increasing its P/B to 3.5 from current P/B of 3.0, there are various possibilities.
I have assumed that, it may be difficult to expect past 10 years book value growth since I am assuming that NPA(s) may rise and hence Book value after adjusting NPA(s) may not grow as fast as last 10 years. Considering that, HDFC is now merged with HDFC Bank, there is likely shrinkage in NIM and also possible increase in Gross NPA(s). It may not happen but I have considered conservative picture.
Following could be the worst, most likely and best case scenarios:
Keep in mind that, 10 Year Median P/B is 4.0 but I have considered Exit P/B of 3.5 (as conservative approach).
So there is a possibility to see reasonable 11 to 14% Price CAGR here.
Note : In real life, these estimates may or may not work as things are changing and competition from Fintech is also increasing. This is not a buy/sell recommendation.
I have assumed simple scenario. Actual scenario will be complex if there is share buy back, Fund raising via various routes in which case book value growth would be different.
A lot of people on bank accounts creation are missing the point discussing number of kids, operative accounts and such. What matters is, the infrastructure for scaling up is in place for fast transmission of money. Are banks intermediaries and gate keepers of these transactions? Yes!
Digitisation of banking services has helped banks to be more prudent in their lending. They can see you financially, if your PMJDY accounts are not active, net zero etc. The question more appropriate to ask is, is HDFC leveraging this to become bigger, better and faster.
I really don’t think so. Note that I’m continuing to accumulate this stock.
In 2023, banking is near full penetrated market. There will still be growth due to rise in population.
I don’t think people who use multiple bank accounts (yield chasers) use HDFC as secondary account, as their interest rates on deposits are always conservative.
HDFC Bank still has this engine/track record of growth with potential to propel quality growth over the years, 10-15%, till it becomes so big that law of diminishing marginal returns kick in.
My newest savings account was HDFC and it is my primary account. I’ll always trust/prefer the sector leader for large amount( more than 4L) of Fixed deposits( percentage wise it might be a small percentage of someone’s portfolio). They give 7.2% on deposit, I don’t think it’s conservative.
There is a craze of small finance Banks giving upto 9% interest. Don’t worry, just wait and watch, some of these small finance banks will go bankrupt then people will understand the value of sector leader.
We can leave penetration topic, it’s very subjective. It’s a long debate topic like is this penetration actually real or shallow.
Note: I’ll also prefer SBI but I hate their services.
@ahmed Your observations look useful.
Currently many large banks are not offering even 7.2% interest, so this is a reasonably good rate.
People still prefer large systemically important banks like SBI, HDFC Bank and ICICI Bank as their primary banks and then generally consider other banks. Many of my friends in IT and Non IT industry have accounts in SBI and/or HDFC Bank.
Conservative lending practice of HDFC Bank will help them to grow in difficult times, and so far they have maintained their Gross NPA(s) below 1.5% for almost 3 decades. I believe this is the primary reason of their steady growth.
Episodes like Yes Bank and Many other banks having Gross NPA at much higher levels will face difficulties when the credit cycle turns around and the bad loans goes up.
Hence banking business is very tough business to do, and prudent lending practices are necessary to survive for very long period.
HDFC Bank is doing a great job with the PayZapp app.
I am an HDFC customer it has one of the worst digital banking app and netbanking, I am very disappointed with their service even being an Imperia customer service is very bad, I also have a current account and LAP at HDFC, I have recently shifted to Kotak as my main banking app is very nice, their demat interface is also too good, I think as an investor in the past HDFC bank has delivered consistent performance is primarily I think due to its RM led model but nowadays atleast genz people have become smart and know that in the name of helping you manage your money they just want to sell ULIPs and insurance also HDFC bank is there in my society and I know the employees informally as well, they are very candid and are actually under a lot of pressure to meet targets, I personally think this consistency of the bank is because of its stringent targets to employees but in the end it just leads to mis-selling, if they use technology, they can be a much better bank which could keep its employees as well as its customers happy.
I like the bank’s strategy to open branches in rural areas but when it comes to digital banking it is still miles behind other banks.
True, their mobile banking app is not the best. All the pain point or mis-selling you mentioned are practiced by all banks 
(For proof, you can search bank name on Twitter)
I think it is more serious in HDFC because as far as what I have heard if targets are not meet they lose their job, my RM in HDFC shifted to Kotak for a lower package as he just had a kid and wanted some work life balance.
Markets are comparing an Apple to an Apple, and now we will have to wait for next NPA cycle to see who has done a good job at risk management.
Presently the PSU and Pvt banks are VFM.
Comparing historical BV is good way to start, we have to see what would the Mean banking valuation be for any well managed bank.
Perhaps someone can derive what will be the average BV for top 5 pvt banks in next 5 years would give a good learning
