HDFC Bank

INVESTMENT SUMMARY AS AT 31 JULY 2023

HDFC Bank is India’s largest private sector bank, with an industry market share of approximately 10%. The private sector banks, as a whole, continue to gain market share from public sector banks – state-owned entities with around two-thirds of the market that have struggled with poor management and lack of long-term strategic thinking.

HDFC Bank has a decades-long track record of excellent execution and is growing its loans and deposits consistently at 15%+ per annum, far higher than the market as a whole. Since it is growing faster than the overall market, HDFC Bank continues to take market share, and it does so without paying over the odds for deposits or writing poorly priced credit relative to the risk of borrowers.

The bank is almost evenly split between corporate and retail customers today. However, the retail part of the business is growing faster. Hence, we expect Net Interest Margins to rise going forward and, thanks to strong underwriting skills, profitability as a whole to increase. The bank is rolling out branches quickly, enabling it to expand its reach into poorly banked parts of the country, particularly semi-urban and rural parts of India, where banking penetration is half or urban levels. HDFC Bank recently merged with its affiliate, the Housing Development Finance Corporation (HDFC), in effect making HDFC Bank the largest mortgage provider in the country. Mortgages were the only real “gap” in the offering historically, with most mortgages originated being sold to HDFC and HDFC Bank, earning only an origination fee rather than the ongoing interest margin over the life of the loan. There is currently minimal overlap between mortgage customers and those with other products at the bank. We believe this will rise over time as the integration increases.

HDFC Bank trades at 16x forward earnings and is expected to grow earnings at 15-20% p.a. over the next five years through a combination of Net Interest Income growth and lower cost growth as the branch infrastructure matures.