Banking stocks have been badly hit in recent weeks. While the RBI has been busy containing the fall in rupee, the banking stocks have yo-yoed; plunging at every bad news and crawling their way back at small respites.

The series of liquidity control measures taken by the central bank has led to increase in short-term borrowing cost for banks.

Also, it has stretched the cash cycle of corporates and increased the risk of loan defaults for banks.

In such times, it is advisable to stick with banks that have a strong retail focus, healthy return ratios, sufficient capital cushion and minimal bad loans. HDFC Bank is one of the few private banks that score well on all these parameters.

It continued to outpace the industry even in the June quarter. This, along with steady margins, and a very low loan delinquency, justifies its valuation premium over peers.

At the current price of Rs 607, the stock trades at 3.1 times its one-year forward book value, below its long-term historical average of 3.4 times.

The stock was trading close to four times its one-year forward book value three months back. The recent correction in price offers a good buying opportunity for investors with a two-to-three year horizon.

Diversified business

HDFC Bank has consistently outperformed the industry, its loan book growing close to 6-10 per cent higher than the overall loan growth in the banking sector.

Its annual loan growth over the last five years has been a healthy 30 per cent. In spite of loan growth for the entire banking sector slowing to 14 per cent, HDFC Bank delivered a steady performance in the June quarter, with its loan book growing 21 per cent

The bank has been able to deliver steady growth due to its well-diversified loan book, split equally between retail and wholesale. Within retail, the bank caters to a host of segments — from auto loans to business banking. A

well-diversified business provides a hedge to the bank from weakness in some segments. Currently, lending to the auto segment has been weak due to slowdown in the sector.

On the other hand, home loans, business banking, personal loans and credit cards continue to grow faster.

In the June quarter, these segments aided the bank’s retail loan growth of 25 per cent.

Within wholesale loans, the portfolio is well spread among varied industries and businesses.

A large portion of the bank’s lending relates to short and medium tenure working capital and trade financing. So, it has not been much impacted by the slowdown in credit demand from corporates for their capital investments.

Lesser dependence on project finance has aided growth, as consumption spending remains resilient. Wholesale lending in the June quarter grew at 16 per cent over the previous year.

Room to manoeuvre

After the slew of liquidity tightening measures announced by the RBI in July, HDFC Bank was among the first to raise deposit rates across different maturities by 75-100 basis points.

However, the bank has also raised its base rate against which all loans are benchmarked, by 20 basis points recently to 9.8 per cent. Before the hike, HDFC Bank had the lowest base rate (lower than SBI at 9.7 per cent).

Even now, the bank has the lowest base rate among all private banks. Both ICICI Bank and Axis Bank also raised their base rates to 10 and 10.25 per cent.

Thus, HDFC Bank still has headroom to increase lending rates to safeguard its margins. As the cost of funds has increased for banks after the RBI’s measures, this flexibility to re-price loans will hold the bank in good stead. .

HDFC Bank has been able to deliver industry leading net interest margin at 4.6 per cent.

With healthy low-cost current account savings deposits ratio of 45 per cent, the bank should continue to maintain margins.

Strong asset quality

A big concern ailing the banking sector is the rising pace of bad loans. HDFC Bank has been able to maintain a very low level of non-performing assets (NPA).

While the June ending quarter did see some stress in the retail and corporate loans, the net non-performing assets are just 0.3 per cent of loans, amongst the lowest within the private banks.

The bank’s total capital adequacy ratio, as of the June ending quarter, stood at 15.5 per cent, well above the regulatory requirement of 9 per cent.

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