With divergence in the performance of private and public sector banks widening in the last one year, the premium on private banks that offer compelling growth profiles has gone up substantially. Thanks to its healthy loan growth, industry leading margins and very low loan delinquency, the stock of HDFC Bank has gained 35 per cent over the last year.
The fact that the stock trades at a hefty premium to some of its peers in the private space, has not deterred its splendid run.
Even at the current price of ₹1,092, the stock trades at 3.8 times its one-year forward book value, which is twice the multiple commanded by peers, such as ICICI Bank and Axis Bank, and also much higher than its long-term historical average of 3.4 times.
However, at a time when most public sector banks are saddled with huge amounts of bad loans, many private banks that have a good exposure to the retail segment, sufficient capital cushion and good asset quality are clearly a better bet. HDFC Bank, scoring on multiple parameters, will continue to trade at a steep premium to its peers.
For one, the bank’s loan book continues to grow above the industry rate by a wide margin. After a steady 20-22 per cent growth through most of fiscal 2015, HDFC Bank’s loan book continues to grow at a healthy clip. In the latest June quarter, the bank’s loan growth stood at 22.4 per cent, compared with the same period a year ago.
Given that the growth in overall bank credit touched 20-year lows of 9 per cent, HDFC Bank’s credit offtake is commendable.
In 2014-15, the bank’s loan growth was led by the corporate segment rather than the retail space. But since a large portion of the bank’s lending to the corporate segment relates to working capital financing, the risk has been minimal. In the June quarter, loan growth was led by both retail loans (24.6 per cent) and corporate loans (18.5 per cent).
The growth in retail was driven by home loans, auto and personal loans. The commercial vehicle segment that had been impacted due to the slowdown is showing signs of revival. HDFC Bank’s lending to this segment has seen some pick up since the March quarter.
HDFC Bank also sports strong returns — among the top in the private bank space — with return on asset at about 2 per cent.
Besides robust growth in loans, the bank’s industry leading margins have kept its earnings in good stead. Margins have been within a narrow 4.3-4.5 per cent range.
In keeping with the past trend, the bank’s net interest margin for the June quarter stood at 4.3 per cent.
Healthy loan mix, which is tilted in favour of high-margin retail loans (53 per cent), continue to lend support to margins. HDFC Bank, along with ICICI Bank and SBI, has the lowest base rate — against which all loan rates are pegged — at 9.7 per cent.
This will help it compete well when economic growth returns. The bank is also well capitalised to fund the growth. Its total capital adequacy ratio, as of the June ending quarter, stood at 15.7 per cent.
Healthy loan bookMost public sector banks, on the other hand, do not have sufficient capital to lend.
When the economy revives, private banks, such as HDFC Bank, will be better placed to ride the recovery.
A low delinquency rate is the third parameter that works in favour of the bank. The prolonged economic slowdown has weakened corporate profitability, increasing the risk of defaults.
The stressed assets for the entire banking sector are now more than 11 per cent of loans. But for HDFC Bank, its gross non-performing assets (GNPA) stood at 0.95 per cent of loans in the June quarter, within its past range of 0.9-1 per cent.
This is lower than that of peers Axis Bank (1.3 per cent levels) and ICICI Bank (3 per cent levels). HDFC Bank’s restructured book is also very small at just 0.1 per cent of loans.