HDFC Bank: Demonetization Play

| About: HDFC Bank (HDB)
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Summary

It is time to take advantage of the demonetization of Rs.500 and Rs.1000 currency notes in India, which has created severe cash crunch causing temporary disruptions to the economic activity.

HDFC Bank’s stock took a beating, down by 7% in one month and 12% in three months and this pessimism is likely to continue for another two months.

Demonetization is a short-term headwind, and the dip in the stock price is an opportunity for long-term investors.

It is time to take advantage of the demonetization of Rs.500 and Rs.1000 currency notes in India, which has created severe cash crunch causing temporary disruptions to the economic activity. HDFC Bank's (NYSE:HDB) stock took a beating, down by 7% in one month (Some recovery happened) and 12% in three months and this pessimism is likely to continue for another two months. This is an opportunistic time to buy this consistent performer for long-term holding, as the growth opportunities for the bank are still vast, due to strong long-term economic growth prospects of Indian economy and majority of lending in many parts of India was still satisfied by informal sources of lending. From operating side, the company has a significant opportunity to decrease costs by leveraging technology.

The demonetization is not well planned, and even after one month from its initiation, the government is still altering the policies now and then. However, the demonetization should bring money back into the economy that was hoarded by the corrupt. The whole process of demonetization and remonetization is a negative to the economy in the short-term, as it has created big cash crunch resulting lower economic activity. However, it is a positive to the economic growth prospects in the long-term as it brings more taxes and brings back money into the economy that was in idle position and hid.

HDFC Bank's premium valuation should not be a barrier to entering into the stock, as its high quality and consistent earnings performance are rare features that most Indian banks do not possess. Technology leverage should bring more cost savings to the bank in the coming quarters, 30% of personal loans and 20% of other products in fiscal 2016 are originated through the online channel, as the company directs more products towards digital channel, it should become more efficient while increasing customer convenience.

While HDFC Banks peer's growth story is plagued by their asset quality woes, HDFC Bank's conservativeness and stringent underwriting practices put it in a comfortable position to gain market share. Low NPAs are another typical characteristic of HDFC Bank that makes it a compelling long-term buy.

Due to various reasons like lack of convenience and ineffectiveness in loan processing, many people are still after informal sources for credit. A Recent financial survey conducted in four poor states of India, covering 16,000 households reiterated that majority of the households who use credit depend on informal sources for credit.

"Only 7% claim to borrow from banks, 3% from non-banking financial companies and 13% from informal sources; the rest-77%-do not borrow at all."

Source: Live mint

It means there is a big opportunity for banks to expand their loan portfolio, as the interest rates that the informal sources charge for credit are usually hefty compared to bank loans. However, people prefer informal sources to borrow because of the simplicity and convenience that they offer.

As a well-managed bank, HDFC bank is at the forefront at increasing convenience and adopting technology. A considerable amount of its personal loans (30%) and other products (20%) are originated through online channel in fiscal 2016, aggressive adoption of online channels to enable customers to access financial products and services increases convenience. That will shift more borrowers to banks from informal sources.

For HDFC Bank the opportunities for growth are still vast, fast growing branch network, cost-cutting opportunities through technology adoption, conservative management and fast growing Indian economy all put HDFC Bank in a firm footing to grow at double-digit numbers for the next few years. Demonetization is a short-term headwind, and the dip in the stock price is an opportunity for long-term investors.

Disclosure: I am/we are long HDB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.