The main concern was the bank’s loan-to-deposit ratio, which reached 110% after the merger between HDFC Ltd and HDFC Bank. Additionally, the bank’s gross non-performing assets (NPAs) saw a slight increase to 1.26% from 1.23%.
With the rate of loan growth outstripping that of deposits, analysts feel interest rates may come under pressure.
The important question remains: Just how bad will the impact be and how long will it last?
Does HDFC Bank deserve to trade at historic lows?
Research correspondent at Equitymaster Tanushree Banerjee, who tracks HDFC Bank closely, wrote in one of her recent editorials:
“HDFC Bank has never been completely immune to stock market crashes. Whether in 2009 or 2020, shareholders have taken the shares to the cleaners, in every crisis. After all, no business is as closely linked to the economy as banking.
Also, despite HDFC Bank’s reputation for consistency in asset quality and profit growth, the bank has been at the receiving end of investor apathy from time to time.
But what explains the fact that in 2023, when Sensex and Nifty are near all-time highs, HDFC Bank shares are again at rock-bottom valuations?
Not one to offer last minute surprises, the management of HDFC Bank chose to warn analysts about the possible bad news in coming quarters, at the latest call.
But as is usually the case with consistent beings, even the slightest aberration, even if it is temporary, is not forgiven.
The warning of muted margins and slightly inflated NPAs sent the share price back to the April 2020 valuations.
Question is, does HDFC Bank deserve to trade at such historic lows (price to book value below 3x)?”
Read the full editorial to find out: Does HDFC Bank deserve to trade at historic lows?
HDFC Bank’s impeccable dividend history
Investors are wondering if they should buy HDFC Bank amid this selloff.
Their rationale for assessing the risk-reward situation should also include the increasing dividend that the bank pays each year.
The bank has maintained a double-digit dividend payout ratio for all years except the pandemic year.
The payout ratio has only increased over the years.
Talk about consistency in a dividend payout ratio!
So even if the stock dips a little more from the current level, investors will not complain because they will be making passive income through dividends.
HDFC Bank has so far not announced any interim dividend for the financial year 2024.
Last year, it paid the highest ever dividend and investors could expect a similar payout this year as well.
What Next?
Now, for anyone who has been tracking HDFC Bank, it is a known fact that the company has been able to grow steadily over the years to become India’s largest private sector bank.
If one had to go back and see, between 2000 and 2010, the bank used to grow at a compound annual growth rate (CAGR) of 25% which over the years reduced to around 15-18% as the bank became bigger and bigger.
This is normal for any large company.
In an interview last year, Sashidhar Jagdishan, CEO of HDFC Bank mentioned that he expects growth of 18-20% and profits to almost double to $15 billion in 5 years after the merger with HDFC Ltd.
In its latest quarterly earnings call, the private lender’s management acknowledged the need for loan-to-deposit to decline. It stated that the ratio would trend lower over the next few quarters and further stated that deposit growth must be 3-4% higher than loan growth to lower loan to deposit ratio.
The bank is currently focused on deposit mobilization and branch expansion to drive growth and is well placed to capitalize on the recovery in the corporate credit cycle.
HDFC Bank has also invested in various startups to fill gaps and gain expertise in many niche services. This helps the bank stay ahead of the curve in the fintech race.
Despite this minor tidbit, HDFC Bank’s strong franchise, the huge post-merger synergies and the long runway for growth, make it a good stock to keep on your watch.
The company’s current market cap stands at ₹1,098,280 crore making it the second most valued company in India after Mukesh Ambani’s Reliance.
After the recent drop, the stock is trading at a 5-year low P/BV of 2.7x, a 30% discount to its 5-year average P/BV of 3.8x.
Here is a table comparing HDFC bank with its peers on important parameters –
In conclusion
In a sector that is so closely linked to the macro environment, HDFC Bank’s ability to maneuver through market cycles with exceptional capital allocation sets it apart from other banks.
HDFC Bank has been the ultimate wealth creator in Indian equity markets.
If you had invested ₹10,000 in HDFC bank’s IPO in 1995, today your investment would have grown to somewhere around. ₹1.5 crores.
As Tanushree wrote in her editorial, the bank has built its reputation of choosing quality over balance sheet size over nearly three decades. The fact that it commanded a premium valuation for most of the period shows investor confidence in the quality and consistency of the bank.
So, will HDFC Bank continue its slow and steady journey and climb up?
All factors indicate that there is a good chance of this happening in the long run.
Happy Investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com