I had always wondered about this contradictory behavior of returning cash to shareholders via dividend and then raising additional capital by diluting shareholders. Dividend payout ratios for ICICI, HDFC have always been much higher than Kotak which had promoter shareholder who was more aligned with shareholders. Dividend yield for large private banks has been around 1-1.5% where as for Kotak it was around 0.07% so big difference of 100-150 bps vs 7 bps.
I think this behavior is explained by looking at the management incentives. Banks are typically valued at BVPS. When large private sectors banks prefer to raise funds when are trading at P/B of 3-5 unless they are forced to raise funds at lower valuation. Suppose bank BVPS is 100, P/B of 4 (share price of 400) and bank has 100 shares outstanding and. When they issue dividend of 1 then updated BVPS is 99.
Now bank issues 1 share at 4 P/B so updated share count 101. Earlier total book value was 100100 = 10,000 now new book value is 100100 + 1*400 = 10400 so BVPS is 102.97 and now Raising money at P/B > 1 raises book value. Increased book value with same multiple leads to higher share price. 102.97 * 4 = 411.88 (price bump from 400)
If you look at history of growth in the book value of HDFC Bank then you can see book value increasing 3-4% every quarter from net income and also increasing in larger step whenever they did share issuance (typically every 3-4 years whenever price was suitable)
This benefit starts to dilute when P/B decreases towards 1 and reverses completely below P/B of 1.
Lets look at the big picture. One of the narratives going around now is that since HDFC Bank is already very big in terms of market cap its growth is going to be limited. Lets take a look at TD Bank in Canada, at a market $110-120 Bn it is roughly 6% of Canadaās GDP. If Indian GDP grows at 6% for 20 years in $ terms our GDP will be close to $13 trillion and if we apply a similar ratio to HDFC Bank we get a market cap of $780B considering the current market cap of about $130B this translates to a CAGR of 9.3% in $ terms and considering historical rupee depreciation of 5% we get to 14%+ and this will go to15%+ if we consider dividends. In absolute terms this is a very good return but relatively this is even better because of the recent run up in the broader markets other opportunities are fairly limited. I am assuming the growth of HDFC Bank will be similar to credit growth in the economy (with market share gains returns can be potentially higher). This narrative is true for other big banks as well so a basket of big banks makes sense.
20 years is a long time a lot of things can change for the better or for worse but the scenario I have painted is not far fetched and we can make decent returns in Big Banks relative to other opportunities in the market.
I see a flaw in your calculation. In my view giving out dividend and raising money at the same time for a company with above average ROCE (signified by P/BV>1) is irrational. It is only done as a positive signaling mechanism to retail investors.
Taking your numbers, Price= 400, BVPS= 100, Total Outstanding Shares(OS)= 100. Lets say company makes a total profit of 100 at the end of the year, and the management just needs 100 for future investments.
Management has two options:
Option 1: Use 100 from profits to invest in future investments.
Total BV=10100; to keep P/BV at 4, price will increase to 404.
Option 2: Give out 100 as dividends and dilute 0.5% to raise 200.
Total BV=100*100-100+(0.5)400100=10100; and Total OS=100.5.
To keep P/PV at 4, price will increase to 402.
As compared to Option 1, the existing shareholders loose even after including the dividend (of 1) in the final share price of 402.
Nice parallel, but Indian banking i suspect is more fragmented with HDFC bank though largest pvt sector bank still current %age is only 4.4% of Indiaās GDP. Also Indian banking is very dynamic due to major presence of Fintechs plus increased prudence coming to PSU lending since last few years.
But i agree given the other opportunities in the market, HDFC bank at current valuations and any falls, may provide a decent 14-15% returns over 5 yearsā¦
Credit growth has typically exceeded the GDP growth. If that continues and HDFC keeps its mkt share and mkt cap growth keeps pace with earnings growth which in turn keeps up with credit growth then 4.4% of GDP should increase going forward. I know a lot assumptions have been made but donāt think any of the assumptions are unreasonable
IMHO , when HDFC Ltd was the parent, there was a compulsion to declare dividend to improve thei parents income . Now that it is not the parent, they do not have any compulsion to declare dividends. Let us see how efficient they are in capital allocation. Disclosure Invested and hence my opinion is biased.
Can you do another calculation when instead of 100 , you distribution only 20 and keep 80 for growth and rest via dilution ?
Also, a company gets a part of premium when it pays dividend, stop paying dividend and sell pressure will start from dividend seeking funds/institutions.
Dividend matters a lot for many big institutions , check the price of meta stock today when it announced its first dividend , and check the fall in Disney stock in past when it had announced in it would stop dividend.
HDFCās presentation uploaded yesterday for Institutional meetings
Chasing market euphoria never helps to make money unless you have skill to exit at the peak (before music stops!). Presently, so much negativity around HDFC bank & Kotak bank and so much positivity on PSU!!
However, for me this is the right time to leave the crowd and work alone and buying HDFC / Kotak bank on every correction. Look at the franchisees/subsidiaries of HDFC & Kotak bank - all are cherry on the cake !. Believe me same crowd, one day chase HDFC / Kotak Bank, giving so many reasons to buy it when tide turn!.
If you are believing - India going to be the third largest economy, it will be gross mistake to believe that HDFC/Kotak Bank will not give an excellent return ahead !
Disc - invested in HDFC Bank and Kotak Bank at lower level
Absolutely True, no need to ask anyone , those who has the account in PSU banks , please visit and get the experience,
I feel this is an good opportunity for us to accumulate such great companies.
Being a contrarion doesnāt necessarily mean you are right and should not be oneās investing thesis.
I believe itāll be difficult to get 20% plus cagr from HDFC Bank at present over the next ten years and thereās significant risk in allocation to one company.
Why is it not better to pick a MF like PPFCF to generate better alpha and a more diversified portfolio?
With 8.1% of weightage in HDFC bank, PPFCF is betting heavily on HDFC bank for its next 5 yr return as they are reducing their exposure to ITC and Bajaj Holding which i think is the right strategy.
PPFCF would have had more than 8.1% exposure to HDFC bank but being a MF they cannot. They have kept 1.9% as cushion for any market crash scenario or they had already at 10% now after this 15% correction within a month. But retail investors have the gift of having unlimited exposure to a given stock.
we are at the peak of rate cycle. A minimum of 3 to a maximum of 6 rate cuts expected in HY2 of FY25. I always wanted to have big exposure to high quality company at lower valuation but it never happened in case of HDFC bank in the last decade except covid crash. But i had plenty of other options during that crash. Now when entire market is at peak valuation, i am glad to see HDFC bank at 14.7 PE which gave me the opportunity to increase stake throughout FY24. If return expectation is to beat nifty by nominal 3%, then HDFC bank may be right choice for next 5 yrs.
Yes, PPFCF had 8% exposure to HDFC ltd. before jan 2023. After merger of HDFC twins - they are now holding the bank.
What I find very interesting personally is that it is HDFC ltd. which has brought up the cost of capital after merger and therefore, that lead to the market giving them a good beating. PPFCF was betting on this business with higher CoC and lending across specific lending categories.
Also, Mr Thakkar had earlier spoken about how 3-4 quarters after merger will be difficult and will take streamlining business. Streamlining = replacing high cost of capital of HDFC ltd with the Low cost of capital which bank gets. (This happens on maturity of various loans). This will lead to margin expansion.
Another thing, HDFC ltd deposits are not growing at the pace of lending. For deposits:
- they are increasing branches (longer term)
- recently credit card offers (isolated example - on mac products) are being pushed out by HDFC
- macro economic activity this year may increase liquidity in the market and also
- once some of the oversold (without fundamentals) scripts take a beating - money will come back to saving account, FD or big solid companies.
I like how things stand. Open to other critiques.
This is just my opinion and Iām invested. Therefore biased.
Thanks for reminding about PPFCF stake in HDFC Ltd before merger. I edited my comment accordingly.
Apple products have record sales in this quarter, and HDFC bank has issued record number of cards in the last quarter.
For Q4 2023, Apple reported USD 8.6 billion in revenue for its India business. This represents a 3% year-over-year (YoY) growthAssuming at least 50 % of Apple customers in India have bought their Apple products by HDFC card ( rest have purchased at No cost EMI from other banks or sold their silverā¦ ) that makes for USD 4.3 Billion dollars. Also YOY its just a 3% growth, HDFC bank has a long runway with an Apple in Hand.
Disc : Invested
I dont think comparison with Apple is fair. Apple is an aspirational brand across the globe. Forget the US, there is no competitor across the globe that offers Apple like experience with owning Smartphones - atleast in the minds of people.
Coming to HDFC Bank
The positives -
- the good thing now is that at this point, the starting valuation becomes a little more comfortable to provide decent returns.
- We have Macro tailwinds.
- Branch expansion shows they are again ahead of the competition
- HDFC Bank is a well oiled machine that will continue to deliver on profits, may be 17-18% compounded the next 5 years. Beyond 5 years I think this slows down further.
The Constraints -
- The base is high. Sustaining incremental growth at 20% will require consistent aggressive push of products to customers. Customers may not like after a point.
- Other banks have pretty much caught up or bettered the tech being offered.
- Competitors with lesser customers to manage provide better service. Eventually customers will prefer those as well.
- Corporate Governance at competitors has improved. Tech has led to bringing in more transparency. Debacles like Yes, DHFL, ILFS etc have made regulators more hawk eyed. All these will make frauds in other banks very limited.
- Valuation wise there are still other banks that could offer a meaningful upside - lower base, cautious lending, well capitalized, fintech partnerships, etc. But ofcourse this is to be tested across cycles.
All in all for those seeking consistency with comparatively lower volatility in business performance, HDFC Bank could be the go to bank. For those seeking a higher return albeit with higher risk, other banks offer great value.
Disclaimer - Recent entry in HDFC Bank futures below 1500 and writing calls against it to generate consistent income. Holding multiple other banks as well with a higher weightage in the overall holding.
I may be interpreting this news incorrectly. But, MFs (HDFC amc) , Insurance entities (their investment portfolio) etc are looking to increase holdings in these banks. Due to being promoter of these entities, HDFC bank has to take approval.
It is not the case the that HDFC bank is increasing holdings in these banks.
You are correct. HDFCBK is the parent company of HDFCAMC & HDFCLife. When any of these entities want to increase their holding in banks (for investment purposes), they need to seek RBI nod, made in the HDFCBK name.