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HDFC Bank
Long-term loan growth at 25% - how will the PAT growth be sustained?
HDFCB’s PAT growth historically has been >30% over last 7-8 years aided by
similar balance sheet growth. Going forward, asset growth could slow to ~25%,
given the higher base and the bank’s generally conservative genes. In the near term,
ROA improvements will still sustain PAT growth at ~30%, but these improvements
cannot be perpetual. There is a worry that the ~30% PAT growth may start to
compress and that would be a negative for valuations.
Margins could come under pressure as low-yield lending gains importance:
Proportion of non-retail book has been increasing from <40% in FY09 to ~48%
currently primarily due to increasing exposure to large corporates. Also share of
unsecured retail book has come off by ~400bps over the last 6months. This would be
margin dilutive, given relatively lower yields in short-term corporate lending vs.
retail lending, unless the bank can match these with falling deposit costs.
New rural initiatives: bringing in new risks: HDFC Bank is increasing focus on
the rural segment with initiatives such as rural festival in order to penetrate into the
rural market. If it works, this is an attractive opportunity and is a potential ROAenhancer
over the longer term. However, the business has very different dynamics
and the risk is that it could lead to NPLs. Given HDFC Bank’s strong management
quality, we think that it is unlikely to occur, and, in a worst case, the bank would pull
out of the market and the upsides would not come through.
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