@sabuj - Its just a tool I built for myself to understand the sector
This is very insightful table.
Comparison also shows that HDFC is 6 times more profitable in core banking operations compared to ICICI. No wonder about valuation difference between ICICI and HDFC.
Also, despite all turn around story in ICICI its operating profits is still half of what it was 5 years back.
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Provisions have increased in case of HDFC bank much higher than trend or expectations. Hence the market is factoring that it.
Even in case of HDFC for which the results were put y’day -
Provisions spiked to Rs 2,995 crore from Rs 116 crore in the year-ago period and Rs 754 crore in the quarter ended September 30, 2019.
If someone is able to get conf call link for HDFC, please do share/pm.
Upto 5 lakh deposit insured
Since 2005, banks have been paying a flat-fee premium rate of 10 paise for every Rs 100 worth of deposits to maintain an insurance cover of Rs 1 lakh per depositor. With the extent of insurance raised, banks would have to increase the premium payment, which would eventually be passed on to customers in some form. A debate has erupted on whether each bank should be asked to pay the same premium or whether banks seen to be at a higher risk of failure should be asked to pay more. An RBI committee in 2015 had suggested differential premium for banks based on their risk profile.
Optional exemptions:
- Some people who used to make tax saving FDs etc. may now select the alternative tax method.
- Similarly, cross-sell income through sale of products such as insurance, ELSS etc. may be reduced
- The forced saving culture through these options is now being given some leeway which may not be good in long term
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Twitter thread on HDFC CEO selection committee
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The person and his articles that started it all. Sebi Registered Analyst with Nirmal Bang as per Linkedin.
- The score mentioned in the report is more than 5 years old and still the highest for HDFC bank among all banks mentioned in the list all the three years. We also know how it performed during all these years.
- Regarding the succession plan, there can always be difference of opinion among CEO and non executive chairman. But the article indicates as if an outsider selection is not good for the bank. I think as minority share holders, we can’t evaluate and need to trust BOD and their decisions. Bringing an outsider in Indusind bank about a decade ago did wonders for the bank. To me, the articles do not have much substance.
The scores are for risk-assessment-report, so they measure risk, higher score is worse.
Sometimes, you have to take audit reports of Govt bodies with a pinch of salt. Some risks are also what one would term as freedom and enablement of managerial staff. It does pose operation risk but it is calculated risk one needs to take for quicker decision making and hence growth. Now I am not sure how much auditors of RBI understand that HDFC used technology to manage some of these risks. Note emphasis on: non-IT operational risk.
It is like a captain keeping a ship anchored at harbor will have zero risk whereas a dare-devil captain can sail a ship into a real dangerous storm. But best captain takes manageable risk and uses his skills to sails the ship through reasonable turbulence.
If things were so bad it should have reflected in credit cost/NPA as it has been close to 5 years.
I have personally got credit cards with good limits with a couple of banks. Only HDFC sent an agent to physically verify my residence.
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A write-up on HDFC Bank for those who are interested:
https://seekingalpha.com/article/4321610-hdfc-bank-unwarranted-premium
I have no positions.
RBI policy changes and impact on banking sector
1.First, the RBI is closing its window for the fixed-rate daily and 14-day repo. Beginning February 15, it opens a new repo window for long-term one-year and three-year tenures as part of its long-term repo operations (LTRO). Commercial banks borrow money from the central bank’s repo window, offering government bonds as collateral. Instead of overnight and fortnight money, they will now be able to borrow one- to three-year money at 5.15 per cent. This will bring down the cost of money for them and push down the bond yields in the short term.The bond market instantly reacted to this move, pushing down short-term bond yield by 15 basis points (bps) and long-term 6 bps. One bps is hundredth of a percentage point.
2.Under the norms, banks are required to keep 4 per cent of their NDTL in the form of CRR with the RBI on which they do not earn any interest. By freeing them from this obligation, the RBI is boosting their income as they can lend and earn on this 4 per cent resources which otherwise would have been kept with the regulator.
3.Third, banks were allowed a one-time restructuring of loans given to MSMEs that were in default but did not turn bad as on January 1, 2019. For such restructured loans, the banks were not required to set aside money for provision as they continue to remain “standard”. The restructuring of the borrower account was to be implemented by March 31, 2020.
4.Finally, the RBI has allowed an extension of the date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another year without downgrading the assets. This, in sync with the treatment accorded to other project loans for non-infrastructure sector, is something which the real estate sector has been crying for long.
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Just to flag one possibility
The infallibility of some ideas get tested when there is a transition from a larger than life figure to the next person, no matter how good he/she is. One can always argue that a proven business is more than an able management but a change in the head honcho can signify a change in narrative if not a break in narrative. Cases in point -
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Watch the stock price of Infosys once the higher profile leaders went out, the moment the business engine slowed for a couple of Q’s the stock under performed for years together after that
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See the change in perception and the stock price trend in ICICI Bank once there was a head honcho change in 2018. Some things may have changed but no way you can explain the spike of 40% for not much change in the business numbers
Some businesses that have a “holier than everyone else” narrative are prone to the narrative breaking once there is some change. Now imagine if Mr Puri goes out and a very capable replacement takes over, but the business momentum slows down for a couple of Q’s for reasons that are not linked to the management change at all. The investor fan base that HDFC Bank has might suddenly start thinking - Has the business lost it’s magic? And then it can become a self fulfilling prophecy
It sounds very silly but as an outsider who has never owned the HDFC Bank stock, this possibility stands out to me. It may so happen that the opposite actually happens, but do consider this possibility and try to have a strategy in place.
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Let me put most recent example of HDFC group company
Hdfc life…Amitabh Chaudhry gone to axis bank and Vibha Padalkar takeover was absolutely smooth and seamless
All recent Aditya puri interview suggest the same
Thanks
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HDFC as a group seem to have a solid leader factory with solid guys at helm across companies - each a top player in space, that says a lot about their brand equity and ability to de-risk leader dependence.
Aditya puri shadow will not be easy to overcome for new leader though, given the mandate of external hire being clear- some departures( disruptions)have taken place already.
Would have liked bit longer overlap/shadow period for new hire - but hey these guys would know what they are doing. Lot at stake here.
If at all some non-positive growth impact coincides with new leader on-boarding and there is a correction, will send ripples at group level too!!! Very remote chances IMHO.
You make a very valid point. Even Buffett has in the past emphasized the significance of management in lending and insurance. While there is uncertainty over leadership, it also gives opportunity for people like me who have always regretted not having in their portfolios, to invest at about the lowest valuations (in terms of PE not PB) in almost past five years. So one should figure out how much of HDFC Bank’s value is attributable to the business model and how much on leadership and see if the trade-off makes sense at CMP.
Regards
SJ
Amongst the SBI Cards IPO ehuphoria, I fail to understand why should I buy such a highly expensive stock, and rather not accumulate more of HDFC Bank:
- HDFC cards market share is 27% while that of SBI Cards is 18%
- No where can SBI Cards match the aggression,variety,reach,rewards,innovation that HDFC credit card offers- right from Uber customers to lower middle class folks
- More penetration and growth due to high digitisation at HDFC Bank and cross sell due to Smartbuy and payzapp platforms
- Bank’s PE is 24 while SBI Cards PE(TTM) as per RHP is 80 : though I am not sure how to calculate the value of the standalone cards business at HDFC Bank
5.No additional baggage of a PSU bank
Am I missing something? views invited. Also if someone knows how to value the cards business of HDFC Bank,please let us know.
Disclosure: have a high allocation to HDFC Bank in my portfolio.
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Read this on twitter …amazing analysis by Gordon@gordonmax
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 organized
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
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