It's no secret that there has been an incredibly negative sentiment around the stock of HDFC Bank ever since it came out with the third quarter earnings in January 2024.
When the quarterly results of the bank came out, the street was not too happy with it.
Amongst other things, the main bone of contention was the loan to deposit ratio of 110% post the merger.
Apart from loan to deposit ratio, the bank's gross non-performing assets (NPA) also increased to 1.26% from 1.23%.
With the loans increasing at a faster rate than deposits, analysts feel that interest margins will come under pressure.
The important question has been, and continues to be, just how bad will the impact be and how long will it last?
Co-head of Research at Equitymaster Tanushree Banerjee tracks HDFC Bank closely. Here's what she wrote in one of her recent editorial:
Read the entire editorial to find out: Does HDFC Bank Deserve to Trade at Historic Lows?
Investors are wondering whether they should buy HDFC Bank amid this sell-off.
Their rationale to gauge the risk-reward situation should also include the growing dividend that the bank pays every year.
The bank has maintained a double-digit dividend payout ratio for all the years except the pandemic year.
As a matter of fact, the payout ratio has only increased over the years.
Year | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Ratio (%) | 19.5 | 19.4 | 18.9 | 18.9 | 18.3 | 19.2 | 19.2 | 19.1 | 18.8 | 18.8 | 18.8 | 18.5 | 18.2 | 18.3 | 5.0 | 11.3 | 22.6 | 23.1 |
So even if the stock dips some more from the current level, investors won't complain as they'll be making passive income via dividends.
HDFC Bank has not announced any interim dividend so far for the financial year 2024.
Last year, it paid the highest ever dividend and investors could expect a similar payout this year as well.
Now, for anyone who has been tracking HDFC Bank, it is a well-known fact that the company has been able to grow consistently over the years to become India's largest private sector bank.
If one was to go back and see, between 2000 and 2010, the bank used to grow at a compounded annual growth rate (CAGR) of 25% which over the years has reduced to around 15-18% as the bank has become bigger and bigger.
This is normal for any big company.
In an interview last year, Sashidhar Jagdishan, CEO of HDFC Bank had mentioned that he expects a growth rate of 18-20% and profits almost doubling to US$15 billion in 5 years after the merger with HDFC Ltd.
In its latest quarterly earnings call, the private lender's management acknowledged the need for loan to deposit ratio to decline. It stated that the ratio would trend lower over the next several quarters and further stated that deposit growth must be 3-4% higher than the loan growth to bring down loan to deposit ratio.
The bank is currently focussing on deposit mobilisation and branch expansion to drive growth and is well-placed to capitalise on the pickup in the corporate credit cycle.
HDFC Bank has also been investing in various startups to fill gaps and gain expertise in many niche services. This is helping the bank stay ahead of the curve in the fintech race.
Notwithstanding this minor blip, HDFC Bank's strong franchise, the huge synergies post the merger and the long runway for growth, makes it a good stock to keep on your watchlist.
The current marketcap of the company stands at Rs 1,098,280 crores making it the second most valued company in India after Mukesh Ambani's Reliance.
After the recent fall, the stock is trading at a 5-year low P/BV of 2.7x, a 30% discount to its 5-year median P/BV of 3.8x.
Here's a table comparing HDFC Bank with its peers on important parameters -
Company | HDFC Bank | Axis Bank | ICICI Bank | Kotak Mahindra Bank |
---|---|---|---|---|
ROE (%) | 17.2 | 8.8 | 17.7 | 14.2 |
ROCE (%) | 15.2 | 9.3 | 15.3 | 13.9 |
Latest EPS (Rs) | 77.7 | 43.5 | 60.5 | 87.7 |
TTM PE (x) | 18.6 | 24.4 | 16.9 | 20.6 |
TTM Price to book (x) | 2.5 | 2.2 | 3.1 | 2.9 |
Dividend yield (%) | 1.3 | 0.1 | 0.8 | 0.1 |
Industry PE | 17.9 | |||
Industry PB | 2.4 |
In a sector which is so closely linked to the macro environment, HDFC Bank's ability to manoeuvre through market cycles with exceptional capital allocation sets it apart from other banks.
HDFC Bank has been the ultimate wealth creator in Indian share markets.
If you had invested Rs 10,000 in HDFC bank's IPO in 1995, today your investment would have grown to somewhere around Rs 1.5 crore.
As Tanushree wrote in her editorial, the bank has built its reputation of choosing quality over balance sheet size for nearly three decades. The fact that it has commanded premium valuation for most of the period shows investor trust in the bank's quality and consistency.
So, will HDFC Bank continue its slow and steady journey and climb upwards?
All factors indicate there's a good change of that happening over the long term.
Happy Investing!
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Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.comDisclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...
Yash Vora is a financial writer with the Microcap Millionaires team at Equitymaster. He has followed the stock markets right from his early college days. So, Yash has a keen eye for the big market movers. His clear and crisp writeups offer sharp insights on market moving stocks, fund flows, economic data and IPOs. When not looking at stocks, Yash loves a game of table tennis or chess.
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