Investors always have this dilemma – Should I buy HDFC Bank now? What’s the future of HDFC Bank?
Banks are usually very opaque hence difficult for a retail investor to understand, therefore I have done a stepwise fundamental analysis of the whole private banking sector so that we can make out whether HDFC Bank with such a humongous fan following in the Dalal Street is really going to be the ‘Bank for the Buck’.
This analysis is done for a long term investment purpose.
Here comes our 3 step method of doing Fundamental Analysis of a Bank vis a vis its peers:
- Financial Analysis (Cost to income, ROE, ROA, CASA, NIM, Profit Growth)
- Qualitative Analysis (Leverage, Asset Quality, NPA, Real Estate exposure, Management Quality)
- Valuation (Return Analysis, PB, Reverse Discounted Cash Flow) You may want to see a guiding video for better clarity of the process here:
- Financial Analysis: It includes analyzing the Operational as well as the financial performance of the banks. Firstly let us analyze HDFC Bank’s Operational parameters vis a vis its peers as below:
|Kotak Mahindra Bank||4.4||47.0||56.7|
Secondly, let us analyze HDFC Bank’s Financial parameters vis a vis its peers as below:
|ROE||RoA||10 Year Profit CAGR (%)|
|Kotak Mahindra Bank||13.67||2.14||20.66|
As depicted in the table below, it may be noted that in the case of RoA Kotak Mahindra have a better RoA than HDFC but if we see the RoE, HDFC beats KMBL
2. Qualitative Analysis
Let us now look at the quality of the portfolio of all the leading private banks
|Gross NPA(%)||Leverage (D:E)||Real Estate Exposure %||Management Salary (X)|
|Kotak Mahindra Bank||2.7||2.78||9%||52|
The Answer to the high ROE of HDFC vs KMB lies in leverage ratio as RoE= (1+D/E)XRoA, In other words, due to the high leverage of HDFC (5.38) against KMB (2.78) HDFC ROE is higher than KMB. Overall HDFC Bank fares decently on these Quality parameters.
3. Valuation Analysis
(A) Price to Book Value
Price to book value is in line with the 10 year Stock price CAGR with the market giving premium to HDFC Bank & KMB for their consistent earning growth leading to healthy price CAGR.
If we look at the historical P/B (average 4.08) of the Bank then at the current market price with P/B of 3.25 the Bank seems to offer a margin of safety.
(B) Reverse DCF
Let us look at the valuation using Reverse DCF. Here we have used FCF= PAT-Capex for simplification as for a bank standard CFO does not make any meaning (vis-a-vis PAT).
Conclusion: What I Think about HDFC Bank?
The conclusion reminds me of this :
“The Next HDFC Bank is HDFC Bank”
– Ramdeo Aggarwal
Bank being in a process-driven industry the bank with Right People, Right Processes wins the long term battle. The bank has established super-efficient processes and seems to have the people to drive the business further. I would like to add to the recent phenomenon adding muscle to HDFC Bank’s strength here:
- With progressive weakening in Yes bank & Indusind Bank, the corporate as well retail CASA has shifted to primarily HDFC & ICICI Bank.
- Recent RBI guideline on the opening of Current Account (“Where a bank’s exposure to a borrower is less than 10% of the exposure of the banking system to that borrower, while credits are freely permitted, debits to the CC/OD account can only be for credit to the CC/OD account of that borrower with a bank that has 10% or more of the exposure of the banking system to that borrower”) also strengthen the position of a dominant bank against its peers, which further paves the way for HDFC Bank