Why is HDFC Bank not rising?

HDFC Bank Limited is one of India’s leading private-sector banks, renowned for its strong market presence, extensive customer base, and robust financial performance. Established in 1994 and headquartered in Mumbai, the bank operates through a comprehensive network of branches, ATMs, and digital channels, serving both retail and corporate customers across India.

It offers a range of financial products, including personal and business loans, credit cards, savings and current accounts, fixed deposits, and investment solutions. 

The merger of HDFC Limited with and into HDFC Bank has created a stronger financial services conglomerate. HDFC Bank has a total of 8,738 branches across India and 15,182 Business Correspondents.  

HDFC Bank has five key subsidiaries: 

• HDB Financial Services Limited (HDBFSL): HDB Financial Services Limited (HDBFSL), in which the Bank holds a 94.6 per cent stake, is a non-deposit taking NBFC offering a wide range of loans and asset finance products. It is engaged in the business of lending, fee-based products and BPO services 

• HDFC Life Insurance Company Limited (HDFC Life): HDFC Life Insurance Company Limited (HDFC Life), in which the Bank holds a 50.4 per cent stake, is a listed, leading, long-term life insurance solutions provider in India. 

• HDFC Asset Management Company Limited (HDFC AMC): HDFC Asset Management Company Limited (HDFC AMC), in which the Bank holds a 52.6 per cent stake, is the Investment Manager to HDFC Mutual Fund – one of the largest mutual funds in India – and offers a comprehensive suite of savings and investment products. 

• HDFC ERGO General Insurance Company Limited (HDFC ERGO): HDFC ERGO General Insurance Company Limited (HDFC ERGO), in which the Bank holds a 50.5 per cent stake, offers a complete range of general insurance products. It offers a comprehensive bouquet of general insurance products – ranging from Motor, Health, Travel, Home, Personal Accident and Cyber Insurance for its Retail Customers to products like Property, Marine and Liability Insurance to its SME & Corporate customers to Crop and Cattle Insurance for Rural Customers.  

• HDFC Securities Limited (HSL): HDFC Securities Limited (HSL), in which the Bank holds a 95.1 per cent stake, is amongst the leading broking firms in India. It offers over 30 investment vehicles spanning asset classes such as stocks, gold, real estate and debt instruments. 

This merger and the subsidiaries have opened up a fresh pathway for future growth and it has established a strong position in the market.  

Industry Overview:  

The Indian banking industry has been on an upward trajectory aided by strong economic growth, rising disposable incomes, increasing consumerism and easier access to credit. The Indian Banking Industry’s cumulative net profit surpassed INR 3 trillion for the first time in FY 24. 

Bank accounts opened under the Pradhan Mantri Jan Dhan Yojana have deposits of over ~US$ 25.13 billion and 51.11 crore beneficiaries have banked as on December 15^th, 2023. 

India is set to become the third-largest domestic banking sector by 2050.  As of July 12, 2024, bank credit stood at Rs. 168.12 lakh crore (US$ 2,020 billion). As of July 12, 2024, credit to non-food industries stood at Rs. 167.82 lakh crore (US$ 2,016 billion). 

According to the RBI’s Scheduled Banks’ Statement, deposits of all scheduled banks collectively surged by a whopping Rs 2.11 lakh crore (US$ 2,544 billion) as on July 12^th, 2024. 

Strengths:  

• Strong Market share: The company is India’s one of 3 systemically important banks with a 15% market share in the banking sector’s advances and a 37% market share in the private sector banks’ advances as of FY24. It is also the second-largest bank in India. It is among the top three banks collecting direct and indirect taxes for the Government of India. It is a market leader in almost every asset category. 

• Extensive Network: The HDFC bank has a huge distribution network with 8,738 branches, 20,938 ATMs, across 4,065 towns and the most interesting part is that almost 52% of branches are in semi-urban and rural areas. With plans for 1,000+ new branches in coming years, HDFC Bank aims to increase its presence in both rural and urban areas while enhancing digital transaction capabilities. 

• Diverse product portfolio: The bank offers a wide range of products and services, catering to various customer segments, including retail banking, corporate banking, and wealth management. 

• Strategic merger: The HDFC limited and HDFC Bank merger has created a combined entity that solidifies the brand’s position as the largest player in the banking and housing finance sectors in India. The merger happened on July 1^st, 2023, and with a NetWorth of over INR 4.14 lakh crore and a combined asset base of more than INR 18 lakh crore, HDFC has become the fourth largest bank globally in terms of market capitalization.  

• Fee Income & Revenue streams:  This is an important aspect of the working of HDFC bank. Fee-based income contributes significantly to HDFC’s financials, driven by third-party distribution products, credit cards, and various retail banking products. In Q2 FY25, fees grew by 17% year-on-year, with strong growth in retail categories but some decline in wholesale fees. 

Risks: 

• CASA reduction: CASA deposits increased by 8.1% year-on-year, with savings account deposits at ₹6,081 billion and current account deposits at ₹2,754 billion. 

• Despite this increase, the CASA ratio declined to 35.3%, down from 37.6% the previous year, indicating that the share of low-cost deposits (CASA) has decreased relative to total deposits. 

• With CASA deposits comprising only 35.3% of total deposits, down from previous levels, HDFC Bank now relies more on time deposits. Since time deposits come with higher interest rates, this shift increases the bank’s funding costs, potentially pressuring NIM, as the cost of funds rises. 

• Asset quality: HDFC Bank’s asset quality witnessed slight deterioration, with gross Non-Performing Assets (NPAs) rising to 1.36% of the gross loans by the end of September 2024 to 1.33% in the preceding June quarter. Similarly, net NPAs or bad loans rose to 0.41% from 0.39% in the June quarter. 

• Loan Deposit Ratio: HDFC Bank is aiming to maintain an LDR closer to the 85-87% range in the long term. Following its recent merger, HDFC Bank’s LDR spiked above 100%, 

• The Loan-to-Deposit Ratio (LDR) is a financial metric that measures the proportion of a bank’s total loans to its total deposits. It indicates how much of the deposits a bank is using to finance loans versus holding as cash or other liquid assets. 

• As per the con-call report, the bank now aims to lower its LDR to the mid-80% range (around 85-87%) over the next two to three years. 

• Initially, management expected that returning to this range would take about four to five years, but favorable market conditions have allowed them to accelerate the timeline to achieve it within three years. This progress needs to be carefully observed.  

• Interest Rate Risks: Interest rate risk is the risk that changes in market interest rates will negatively affect a bank’s profitability, primarily by impacting its Net Interest Margin (NIM) and the economic value of its assets and liabilities. Banks are particularly exposed to interest rate risk due to their role as financial intermediaries, where they fund long-term loans (assets) with shorter-term deposits (liabilities). 

Financials:  

Looking at HDFC Bank’s financial growth over the years, the numbers tell an impressive story of resilience and expansion. Revenue has nearly quadrupled from March 2017 to March 2024, with a particularly substantial jump in FY24, likely influenced by the merger with HDFC Ltd., as well as an aggressive push in lending and product offerings. Interest income also surged, especially in FY24, showing the bank’s strong positioning in a rising rate environment. 

Net profit growth is equally compelling, showing consistent double-digit increases and reflecting effective cost management and a high-quality loan book. The bank’s EPS has steadily risen, suggesting increasing value for shareholders and a strong return on equity. This performance underscores HDFC Bank’s dominance in India’s financial sector, merging steady growth with strategic expansion. The FY24 numbers in particular reflect a new phase of growth, positioning the bank well for continued success in the years to come. 

Shareholding Pattern:  

HDFC Bank’s shareholding pattern in March 2024 tells a dynamic story. With promoters’ stake dropping to 0% post-merger, control has shifted to institutional investors and the public. FIIs now hold a commanding 47.83%, while DIIs have also increased their stake to 33.33%, underscoring robust institutional support. Interestingly, public shareholding has risen to 18.64%, with a surge in retail interest as the number of shareholders nearly doubled in a year.  

Growth Triggers:  

• Booming Real Estate: The banking, financial services, and insurance sectors play an instrumental role in supporting the expansion of the real estate sector. It facilitates essential financing for home buyers through mortgage products and offers capital to developers through construction finance and lease rent discounting. India is today in an unprecedented urbanization drive, fueled by rising incomes and aspirations cutting across metros and beyond. The real estate sector is expected to reach a market size of US$1 trillion by 2030, a significant increase from US$ 200 billion in 2021, contributing 13 percent to the country’s GDP by 2025. 

• Continued Government Support: Government initiatives & policies are supporting the Indian banking industry. The Pradhan Mantri Jan Dhan Yojana scheme aims to ensure comprehensive financial inclusion of all the households in the country by providing universal access to banking facilities. Under this program, a person not having a savings account can open an account without the requirement of any minimum balance and, in case they self-certify that they do not have any of the officially valid documents required for opening a savings account, they may open a small account. Currently, there are 52.08 crore beneficiaries of this program holding an amount of Rs. 2.29 trillion (US$ 27.56 billion) in their accounts. In addition, programs like the Atal Pension Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Stand Up India Scheme have also helped create growth for this industry. 

• Growing digital transaction: Digital payments have significantly increased in recent years, because of coordinated efforts of the Government and RBI with all the stakeholders. India accounts for nearly 46% of the world’s digital transactions as per a few estimates. 

ESG:  

Environmental: Three years ago, the Bank set an ambitious goal of achieving carbon neutrality on emissions from its own operations by FY32. 

Bank is now integrating renewable energy sources into their power consumption, through captive solar panels in certain offices. They have commissioned a total of 25 rooftop solar installations with a total capacity of 720 kWp.  

A total of HDFC’s 2,026 offices and branches are Indian Green Building Council certified.  

Social: HDFC Bank through its CSR initiative, Parivartan, has maintained healthy presence in community activities in five focused areas: Rural development, Education, Skill Development and Livelihood Enhancement, Healthcare and Hygiene and Financial literacy and Inclusion. 

There are a total of 10.19 crore beneficiaries from the CSR activities as of March 2024 across 28 states and 8 UTs. HDFC Bank has spent around INR 945.31 crores on the Parivartan program. 

Governance: Following the merger of bank, HDFC Bank no longer has a designated promoter entity. Without a promoter entity, HDFC Bank’s shareholding is widely distributed among institutional and retail investors, including foreign portfolio investors, mutual funds, insurance companies, and individual shareholders. 

The absence of a promoter may strengthen the bank’s corporate governance by reducing potential promoter-driven influence, giving the board more independence in strategic and operational decisions. With no single controlling entity, HDFC Bank may attract more institutional interest, as many investors view a broad-based ownership structure positively in general. 

Conclusion:  

HDFC Bank is a major market leader and a fundamentally strong company, with consistent growth in both revenues and profits. However, the bank should focus on reducing its Loan-to-Deposit Ratio (LDR) and managing its CASA ratio effectively to ensure that its Net Interest Margin (NIM) remains stable. This will further boost profitability and strengthen its financial position. It remains to be seen if HDFC will remain the darling of its customers and of the investors over the long term especially with competition fast catching up on the technology front, introduction of low fee accounts, value added services, growing branch networks and better client experiences. 

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