Professionals leaving banks is common now-a-days. Many banks have reported high attrition rates in last Annual Reports.
This is a major area of concern, as senior professionals leaving for such reasons like high stress and nil work life balance can create operational risks to well managed banks.
This is common area of concern for investor in banks. IT industry goes through this ritual of firing people after every 4-5 years which does not create a good impression about IT companies. This trend seems to be now catching up with Banks.
Some of these reasons are good enough for Mr. Market to give lower P/B multiples for private banks going forward. Toxic work culture often leads to frauds, wrong practices and reduced productivity.
Having said this, Banks is general will remain a long term growth story in many nations which are still growing with rising population.
Above statements are my general observations and nothing specific to HDFC Bank.
The main issue is elsewhere. Post the Merger, the merged entity became the base case. The erstwhile HDFC could do lot of transactions (especially to Real Estate Developers) as an NBFC. Those deals are not possible in a Scheduled Commercial Bank. Hence the base needs to be treated as lower as once those loans fall off, they cannot be replenished. Now if you apply the ratios on that revised lower base, things will look different and ratios will make sense. Highlighting this subjective aspect. Someone who has the data can do the number crunching.
Disclosure : Was my highest holding for more than 15 years but completely exited before the Merger on these grounds.
Just HDFC Bank. There are no sectoral concerns per se. However I tend to stay away from any Financial institution with P/B of >3x. Happy to ride if I hold but wont add at those levels. However with regulatory tightening (maybe for the right reasons) its difficult for any institution to have any serious competitive advantage over others to justify premium valuations. It will eventually boil down to Cost of Funds, Technology and good underwriting standards cum execution.
The HDFC Bank ADRs dropped by more than 4.5% today after the Q3 results were announced. Usually not a good sign. Could be because of NPA or provisions numbers?
Well mangement is facing issues with Deposits not keeping pace. Thanks to all of you withdrawing money at placing at the right place . They are constrainted on capital (Loan to deposit ratio is 120 % while they use to be 85 %). Increasing more branches , they basically made up to increase number of branches. In all management is not appearing to have all the answers (confdence was clearly missing). Cost to income does not come with size so not sure how they will growth of 20s.
Loan growth has surpassed deposit growth and Loan/Deposit ratio seems on higher side as compared to last few years. CAR is also reduced. Ability to raise deposits is going down even after increasing branches in Rural areas.
Probably it will take some time to reflect in deposits.
These could be the concerns. Also NIM will take some time to go to reasonable levels. GNPA has started moving up but should not be a major concern.
They have managed to report very good Net Profit growth in spite of all these concerns which is a Positive. I believe Management may able to overcome some of these concerns but will take few quarters.
Disclosure : invested since 2011 but have been prudent in booking profits from time to time.
Informative content from Ishmohit @Worldlywiseinvestors and on time once more. Kudos! However, I would contradict the valuation estimates. I would rate the exit PB in 2027 to be as follows (CAGR estimates are derived from his own modelling sheet):
This seems to be the most reasonable assumption set to me.
Because even if we assume that the current concern of a large base post-merger persists and the stock suffers a long-term derating, I donât see it slipping down below the 2.5 mark indefinitely. But from that same line of thinking, I also feel that investors should taper their expectations and may need to settle in somewhere between the bear and the base case. I would love to hear opposing POVs on this.
There may be cockroaches in merged HDFC NBFC entity which has now come into a more regulated environment. Its very difficult to grow your loan book at past rate with current book size and if you try to maintain that rate then you are bound to fail. Market is very clever and had anticipated all these thing 3 year backs because of which there is hardly any return from HDFC stock.
My belief is that with the current size of HDFC we should moderate our growth expectation and accordingly valuations.
They mentioned in the concall that they will use infra bonds issued to offset affordable housing loans in their books and that will reduce psl requirement, doesnât any have any info on how that mechanism works?
My take on the results
They were slightly disappointing mainly because of the margins, despite exhausting their excess liquidity they margins remained flat
I think this is mainly because of a high liquidity crunch in the system, hdfc being such a large bank cannot get deposit until system liquidity improves, once the casa ratio comes back to 40% margins will improve but I feel it wonât easily go back to 4% plus because of the housing and wholesale loans theyâre doing now. That is also not bad because while top like is lower, opex and credit cost will also be lower keeping the bottom line similar
In terms of loan quality there is absolutely nothing to complain about, credit cost is very low and they have such large provision buffers and adjustments that it really wonât be an issue unless something seriously goes wrong.
My feeling is that things will be tight till June, income tax payment and cash withdrawals for elections will take liquidity out of the system and psl requirement for 1/3 of the hdfc book start in April. Post the election the government might start spending and the RBI might inject liquidity into the system, plus the bond inclusion money will come in and then the margins will improve
Despite the low margins they still managed an RoA of 2% and RoE of 15%, income tax write backs were mostly used for provisions. Even if it doesnât rerate, it should give a steady 15% kind of return once things settle down inline with the RoE
They got about 3000cr of additional gains because they sold Bandhan Bank and got favorable income tax orders but that was used in1200cr of additional provisions for Aifâs they hold and npa provisions so overall the benefit from this was very marginal
Another technical factor is that a majority of funds own HDFC Bank and it is a high allocation for them - having given stellar returns for 2 decades plus.
With the stock struggling, a lot of large cap oriented funds will underperform the Index of they donât cut allocation to HDFC Bank. This can also be a headwind in the coming year alongwith weaker growth than expected
Hdfc makes around 13% of the nifty index. I donât think there are many active funds with 13+ % exposure to hdfc bank. So when hdfc crashes itâs more likely that these funds will outperform the index, not underperform.
A different thought/ pov trying to connect a few things:
Maybe HDFC bankâs deposits growth slowing down not to be attributed to its large size?
Or even Merger?
The last couple of quarters has seen a phenomenon interest towards Equity Markets. Itâs obvious to all - there is data on increase in no of DMAT, MF SIP, IPO craze etc.
Can it be co-related to cultural shift from FDs to Equity?
. They are constrainted on capital (Loan to deposit ratio is 120 % while they use to be 85 %). Increasing more branches , they basically made up to increase number of branches. In all management is not appearing to have all the answers (confdence was clearly missing). Cost to income does not come with size so not sure how they will growth of 20s.