Future of HDFC Bank – Is HDFC Bank the Bank for the Buck Now?

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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:

  1. Financial Analysis (Cost to income, ROE, ROA, CASA, NIM, Profit Growth)
  2. Qualitative Analysis (Leverage, Asset Quality, NPA, Real Estate exposure, Management Quality)
  3. Valuation (Return Analysis, PB, Reverse Discounted Cash Flow) You may want to see a guiding video for better clarity of the process here:
  1. 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:
Bank NIM CI CASA
HDFC Bank    4.3             39.6 40.0
ICICI Bank     3.7             41.0   41.0
Kotak Mahindra Bank     4.4             47.0    56.7
Axis Bank      3.6             45.8     39.0
HDFC Scores well in 2 out of 3 operational parameters

Secondly, let us analyze HDFC Bank’s Financial parameters vis a vis its peers as below:

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ROE RoA 10 Year Profit CAGR (%)
HDFC Bank 16.50 1.98 24.68
ICICI Bank 8.07 0.78 7.57
Kotak Mahindra Bank 13.67 2.14 20.66
Axis Bank 2.15 0.2 -4.27
HDFC Scores well in 3 out of 3 operational parameters

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)
HDFC Bank 1.4 5.38 9% 175
ICICI Bank   5.5   2.80 20% 99
Kotak Mahindra Bank   2.7 2.78 9% 52
Axis Bank 4.7 6.20 20% 62
HDFC Bank scores well with low Gross NPA & Low Real estate Exposure. However, HDFC bank Management is drawing a higher salary compared to median employee

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.

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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?

Watch the video to learn more

Prognosis

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:

  1. With progressive weakening in Yes bank & Indusind Bank, the corporate as well retail CASA has shifted to primarily HDFC & ICICI Bank.
  2. 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
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Amitabh Vatsya
Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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