I also used to think the same, but in recent times whenever i have had to visit the branch i realized that its always been busy there. Retired people who prefer to get their passbooks updated sometimes bringing passbooks of not just their family members but also neighbours 
then many times ppl seeking loans come down to the branch, negotiating on the interest rates. ppl visiting branches to operate lockers, etc. quite a few use cases to keep the staff busy.
Pls if you notice the branch size has steadily dropped keeping the rent cost low.
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The best things I like of HDFC Bankâs new management is their silent work. HDFC Bank CEO is similar to ICICI banksâ CEO - no big appearance in TV or otherwise. Also in concall one person reply most queries. It seems they know what they are doing hence silently increasing bank branches mainly in tier - 3, 4 cities.
Disc: Invested, added more in recently. Views are biased.
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Presence of physical branches enable capturing of localised marketplaces, unorganised sector, mom and pop stores etc. Size of branches is small and man-power is reduced. In some branches, branch manager is also doubling as relationship manager for âpreferredâ set of customers whereas larger branches have dedicated relationship managers. There is still variation in level of engagement, at the very least in perception.
And, I presume if cost-benefit of opening branches reverses, they can be curtailed down to few large branches. This has been observed in securities and brokerage business arm of banks where adoption of technology increased sharply in past few years. (PS: Some elderly people still go to bank branches to apply for IPOs via physical mode).
Disclosure: Small tracking position. Contemplating HDFC Bank vs Index value proposition
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The other main purpose of the branches is to sell products.
Whenever someone visit a branch for whatever reason itâs a great opportunity to push the customer into buying
Insurance
Mutual fund
Home loan
Etc etc.
If we all just use Internet banking and never visit the branches, how will they be able to sell all these products?
Whenever they sell insurance, hdfc life can benefit if they sold hdfc life insurance. Hdfc Bank has a stake in that entity so great.
When they sell home loans itâs great because itâs merged with Hdfc now
When they sell mutual fund, hopefully they are selling hdfc mutual funds in which case it boosts hdfc amc which is also great because the bank owns amc.
So as a owner in the bank and amc and hdfc life it is all win win win.
Let them open many branches and sell sell sell more products
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Yesterday i had visited HDFC bank in Visakhapatnam as my upi transactions were blocked and they had insisted me to visit the branch personally. After completion of my work, they had insisted me to take term insurance. They are offering term insurances other than HDFC related also. When i told that i had already a term insurance, then they were asking me about mutual funds. They had also offering me other mutual funds also.
Yes, partly true. Again, the opinions expressed w.r.t branch expansion is based on the experiences of different individuals.
The expansion of branches into Tier 2 and 3 is meaningful because these areas are typically served by PSU banks and the private banks would definitely want a pie of that customer base
Other than this, rapid expansion of branches without a clear strategy in urban areas is not convincing to me for the below reasons:
- One gets to see more HDFC banks adjacent to each other, as I mentioned in my previous post. I havenât seen the Kotaks or IDFCs like this
- The majority of the current customer base of private banks are tech-savvy, salaried or business-oriented and will not have time to visit the branches
- Most banks are flooded with either pensioners or those who flood the banks to withdraw the money deposited through various government schemes and Jan dhan accounts (zero value to CASA but only puts operational stress on the banks)
- The consumers are very informed these days when it comes to insurance, and they compare various schemes through aggregators like policy bazaar and ditto before deciding to buy one. Even legacy insurance players like LIC employ associates who will reach out to potential customers at their offices or homes
- The same goes for home loans as well, since agents catch hold of potential customers either at their office or through tele-marketing. On average, I get to receive at least 5â6 calls daily offering pre-approved home and personal loans
I believe the HDFC bank management knows better but they should have a clear strategy for the expansion of branches and justify the same through acceptable revenue per branch and revenue per employee metrics
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Another question in my mind is as follows:
Is 4% NIMs a high probability for private sector banks going ahead or will this shrink structurally due to competition?
If yes, then the large private banks can compund well for us.
If not then there will be time correction in them.
I donât have a framework to think about this. US banks have lower NIMs as a comparison.
Would request anyone who has thought this through to help.
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IMO, NIMs would shrink going forward too. Banks that have physical presence will not be able to compete with fintechs who have less physical presence since higher costs (branch, infrastructure, personnel costs etc) mean higher priced loans to protect NIM which will not go well with people opting for loans when it is available at cheaper interest rates from fintechs.
Nice Perspective put forward by Aditya Grover here:
Hat Tip: alphaideas.in
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And where will fintechs get their money from? They donât raise deposits.
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Thatâs right. Deposits with banks are as it is shrinking. All other source of funds being equal fintech would be able to offer loans at cheaper/equivalent rates and garner better NIM.
Even if you assume no one puts a single additional rupee as deposit into Hdfc.
I suspect hdfc Bank can raise funds via ncd etc at a cheaper rate than the new age fintechs.
When I am looking for a loan, I donât care much which company lend me money. (Money is fungible) but when I am going to lend money (or deposit money which is also lending to the bank even though they donât say it out loud) I very much care about the stability and reputation of the bank.
As far as I know, India doesnât have a deposit insurance like the US (whatâs called FDIC). FDIC in the US covers up to 250k of deposit per account. If a bank goes bust then anything more than 250k is potentially lost. This would potentially mean that I shouldnât really care which bank I keep my money as long as itâs below 250k. But I still choose a reputed bank since I donât want to go thru any angst of getting the money thru the deposit insurance scheme of shit hits the fan.
Even the FDIC in the US is funded by every bank making a contribution. It assumes some banks going bust. But if many large banks go bust, then even the FDIC wouldnât be able to pay everyone I think. All insurances must assume some base case and some worst case scenario.
Back to Indian banking, I think someone told me about 1lk is guaranteed beyond that itâs possible to lose it a bank goes under. So itâs best to keep money in PSB or very reputable private banks (even there over might distribute between multiple banks). I would never deposit any money in any of the fintechs even if they were taking deposits.
During the 2008 financial crisis, ICICI was very close to collapse. You can read about it. Although the bank officials will never acknowledge these things because itâs all based on confidence.
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India does have upto 5L insured by banks covered by DICGC.
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You are correct. Many investors knowing this have stayed away from ICICI Bank after 2009 including me. I was unable to build conviction in ICICI Bank for a long time knowing their high exposure to UK/Europe if I remember correctly. Now things have changed but I have not build conviction in ICICI Bank after 2009.
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Thanks for posting it here, and introducing me to Valuepickr platform. I continue to remain bearish on large private banks and would write more on it, as I am yet to find that competitive edge that used to exist before covid for HDFC and Kotak. What I see happening is margin pressures not going away anytime soon. In Q3 FY24, Axis & ICICI took away good chunk of deposits but happened at a major cost of NIMs compression. If this war for deposits goes on like this, all players would suffer. So iâm still out.
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I have wondered why HDFC bank pays out a dividends. Especially is cash is the raw material for their business, why give it out instead of reinvesting it into the business and earn higher returns.
Plus the dividends gets dissipated to some extent with taxes too.
I understand there may be a large shareholder base for whom the dividends serve as a income but then they could always sell a few stock units to get the cash.
With so much noise around the tight liquidity in the banking sector and real need to shore up deposits due to merger, doesnât it make sense to halt the dividends or atleast cut to some extent?
Would the share tank majorly for such an action?
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Agree. Deposit will come to HDFC. Right now everybody is too complacent to see any risk. Letâs wait for some risk to rear it head.
In the last few messages, many have determined HDFC Bank is at cheap valuation just because it is lower than historical valuations. Is that a good enough reason ?
Things to Ponder
- Why is the bank not able to raise deposits in sync with Assets ?
- HDFC Limited deals cannot be replicated by HDFC Bank since they are under more stringent regulations. How will it be replenished? So forget growth the base itself is smaller to start with.
3.For a giant like hdfc bank to grow 15-20-% corresponds to literally building a new small bank every year because the nos are so big. What is the opportunity size for Hdfc Bank to be able to do it all the time ?
Disclosure- Was my largest holding for 15+ years but exited completely.
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IMHO, not being aggressive in deposits as well as loans may be good in the long run. We all know that Deposit Mela and Loan Mela in the past have only resulted in pain later. The key is how they are able to make a better return for the existing funds in housing finance vertical as this was one of the synergies expected in the merger. Disclosure: Invested My views may be biased.
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Why couldnât they anticipate this before?
Based on your comments, merger seems to have been counterproductive for HDFCâs biz. in the near term, and will take a while to sort things out.