HDFC Bank: Well-Capitalized and Positioned to Prosper

| About: HDFC Bank (HDB)

Conversations about new global growth engines inevitably focus on Asia, with China dominating most such discussions. But there’s another compelling story playing out in the East. Though its top-line growth still pales in comparison to its neighbor’s rate of expansion, India is rebounding from the global downturn at least as well as the Middle Kingdom.

Like all major nations, India reacted swiftly to the recession, cutting interest rates, offering tax breaks and increasing fiscal spending. But new fiscal measures amounted to just 3 percent of GDP, compared to China’s 6 percent. And conservative lending practices have long defined the country’s banking system.

In fact, credit growth was actually slower in 2009 than in 2008. And a recent study by Centennial Asia Advisors concluded that, based on available data, “there was no sign that domestic banks' nonperforming assets were deteriorating materially.”
The long-term potential of the Chinese consumer is often cited as the primary reason to buy China; this consumer-focused narrative is at least as valid with regard to India, where per-capita income and spending power eclipse similar measures in China.

Mumbai-based HDFC Bank (NYSE: HDB), India’s second-largest bank and a pillar of the country’s financial system, beat fiscal third-quarter expectations because of its focus on retail loans, which account for 55 percent of its loan portfolio.

Net profit grew 32 percent year over year to $179 million, while net interest income rose 12.4 percent on declining credit costs. Deposit ratios also improved; the ratio of current and savings accounts grew to 52 percent from the 39 percent a year ago. HDFC’s loan-to-deposit ratio advanced to 77 percent from 69 percent a year earlier, indicating increased ability to fund their loan book.

One of the major lessons of the recent financial meltdown is that relying on retail deposits is a much more reliable way to raise capital and provides greater stability than relying on wholesale funding markets.

The February 2008 acquisition of Centurion Bank of Punjab expanded HDFC’s footprint within India into relatively new rural markets. The bank opened 219 branches during the last quarter, bringing its countrywide total to 1,725.

One factor to bear in mind: Inflation is climbing across Asia as the region emerges from the global recession. In India, the second-fastest-growing economy in the world, prices rose at a rate of 7.3 percent in December 2009, driving speculation that the Reserve Bank of India will raise borrowing rates. Nevertheless, CEO Paresh Sukthankar expects HDFC to grow its loan book by 3 to 5 percent above the industry average in fiscal 2010.

Since its initial recommendation in August 2009, HDFC has returned 31 percent, beating a 16 percent surge in India’s Bankex Index and a 7 percent rise in the Bombay Stock Exchange Sensitive Index. HDFC is well-capitalized and positioned to prosper along with rising Indian incomes.

Disclosure: No positions

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