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HDFC Bank: Research meet excerpts - Views on News from Equitymaster
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HDFC Bank: Research meet excerpts
Feb 7, 2005

Our recent one-to-one research meeting with HDFC Bank gave us very valuable insights on the growth prospects of the banking sector, challenges and where is HDFC Bank placed with respect to the competition. Following are certain key takeaways from the same: On future interest rate movements and its impact on the bank’s margins…
As per the bank, the domestic interest rates are unlikely to be considerably affected by the global benchmarks (US Fed rates and the like) in the near term. On the contrary, it is the dynamics of the Indian economy that will continue to determine the movements in the same. The bank expects the interest rates to either stabilize at the current levels or fluctuate within 50 basis points (with an upward bias) for the next one-year. The bank is also positive about not countering any significant margin pressures in the near term and hopes to maintain NIM (net interest margin) at 3.5% to 3.8% in the next 2 to 3 years (3.7% in 9mFY05).

On the revived credit offtake…
In the management’s view, the revived credit offtake, particularly witnessed after 1QFY05, can be largely attributed to higher demand for working capital (on the non-food credit side). As per the bank, demand for big-ticket capacity expansion plans, as quoted in the pink papers, is far fetched (at least for now). At the same time, the bank is positive on the credit offtake front, both retail and corporates. The bank expects the retail business to grow by 30% to 40% in the next three years while corporate side of the business is likely to grow by 15% to 20% in the same period.

On the bank’s risk appetite and preferred customer profile
The bank has, over the years, stuck to its policy of “low risk-moderate returns-high growth”, even at the cost of higher margins. The bank takes very calculated risks and adjusts the cost of the same while pricing their products. Risk profiling is first done on the basis of ‘product category’ and subsequently on the basis of ‘customer profile’. The “preferred“ customer profile of the bank is the ‘top players’ amongst the corporates (‘AAA’ and ‘AA’ rated companies) and when it comes to retail, salaried (regular income) class is given preference over the self-employed. Although the bank will continue to focus on increasing its retail presence, maintenance of asset quality will remain their top-most priority.

On the bank’s outlook on ‘Project Finance’ and ‘Cash Management’ service…
As per the bank, the focus on the corporate side will be restricted largely to providing working capital related funding and cash management services. This is in line with the bank’s policy of ‘low risk-moderate returns’. However, if need be, they would be willing to advance loans for capacity expansion to their existent corporate clients with whom they have been dealing over the years. The bank also garners sufficient margins from the ‘blue chip clients’ on their cash management services (CMS), which is essentially a ‘service oriented’ business. The bank is adding more cities to their CMS network every year so as to reduce costs and improve spread and servicing capabilities.

On competition…
HDFC Bank currently holds 2.5% of the total market share in the Indian banking industry. Although the number of players in the industry has multiplied rapidly over the years, HDFC bank is optimistic about there being sufficient market potential for all. While the PSU banks and cooperative banks have been losing market share over the years, it is the new private banks that have been gaining on the same. HDFC bank perceives the large PSU banks and the aggressive foreign banks to be its main competitors.

On the US $300m ADS issue…
The US $300m ADS issue (each ADS representing 3 shares) that recently got listed at the NYSE at US $39.25 per ADS added approximately Rs 11 bn to the bank’s networth and hiked its CAR from 9.2% (pre ADS issue) to 12% (at present). The additional capital infusion, has therefore, not only sufficed the bank’s CAR requirements but also equipped it with adequate resources to sustain its growth momentum. The bank plans to deploy the said funds to expand branches and to grow its assets.

On the ‘future’ of HDFC Bank…
HDFC bank perceives itself as a ‘one-stop-shop’ for all financial products in the future. The bank plans to extend its retail network by adding about 100 to 150 branches (covering around 30 additional cities) every year and leverage on it for cross selling of third party financial products. While the bank does see itself targeting overseas acquisitions in the near future, it certainly wishes to be an aggressive player in the domestic market.

Our view…
Based on our interaction, we believe that the bank will be able to grow its interest income at the rate of 25% CAGR over the next three years whilst sustaining margins at the current levels. While there is visibility on the growth front and comfort level with respect to the bank’s ability to sustain profitability, valuations at the current juncture seem to adequately reflect fundamentals. To that extent, investors have to exercise caution.

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