HDFC Bank, India’s largest private bank, has recently attained a prominent position among global banks, joining an exclusive club that includes well-established institutions such as Wells Fargo and HSBC. This development follows the bank’s merger with its parent company, HDFC, which became effective on July 1. As a result, HDFC Bank’s journey to becoming a top-ranked global bank coincides with India’s robust banking sector, marked by multi-year low non-performing loans and a persistent demand for credit. For global investors, HDFC Bank now represents a proxy for India’s growth narrative, with the bank expected to play a pivotal role in reflecting the country’s economic progress on the global stage.HDFC Bank now boasts a market capitalization of approximately $146 billion. Over the past decade, HDFC Bank has consistently delivered impressive compound annual growth rates (CAGR) in profits, exceeding 15%, while many other large banks, except for JPMorgan Chase, have struggled to achieve CAGRs of less than 10% in earnings per share.
HDFC Bank currently holds a price-to-book value (P/Bv) of 4x, which is notably higher than the top ten global banks. This valuation can be partly explained by India’s expected economic growth, which is currently characterized by a growing GDP, benefiting banks. Conversely, it is anticipated that interest rates in India will decrease, potentially favouring the bank’s bond portfolio.
However, this climb in the global banking hierarchy also comes with challenges and considerations.
JPMorgan Chase, with a P/Bv of approximately 1.35x, continues to exhibit growth potential despite challenging conditions in the developed world. The banking sector in the United States and China faces varying dynamics, with some regional lenders experiencing deposit outflows and downgrades due to profitability pressures and concerns about asset quality.
The challenges
While HDFC Bank’s growth story remains promising, challenges lie ahead. As the bank operates with a more substantial balance sheet, mobilising deposits and managing the replacement of high-cost borrowings become crucial tasks. The recent merger with HDFC offers opportunities for deposit mobilisation, enhanced branch productivity, and the expansion of new branches, all of which are expected to contribute to deposit growth. Additionally, the inclusion of home loan customers is anticipated to bolster deposit growth, as these customers typically maintain deposits that are substantially higher than those held by other retail customers.
Uncertainty looms on the economic horizon, as evidenced by various global challenges, including the potential for higher interest rates, quantitative tightening, fiscal deficits, and geopolitical tensions related to the ongoing conflict in Ukraine. Jamie Dimon, Chairman and CEO of JPMorgan, has even warned of the possibility of 7% interest rates in the United States.
The growth trajectory
In the wake of its merger and expanded balance sheet, HDFC Bank aims to sustain its growth trajectory. Achieving this will require the efficient mobilization of deposits and the ongoing replacement of high-cost borrowings. The bank’s performance in maintaining its superior asset quality standards while pursuing growth will also be crucial.
Analysts expect HDFC Bank to achieve a compound annual growth rate (CAGR) of 16%-17% in earnings growth over the next three years, outpacing many global large banks that are projected to achieve CAGRs ranging from 3% to 7%. However, maintaining a balance between growth and asset quality remains essential for sustained success.
In light of recent disclosures related to the merged entity’s financials, HDFC Bank has faced challenges, including a rise in gross non-performing assets. While the core earnings growth may be muted in the near term, there is optimism that net interest margins will improve, resulting in healthy earnings growth over the next few years.
Some analysts remain cautious about its upside potential in the short term, considering factors such as return on assets (RoA) and loan growth pressures. Nonetheless, HDFC Bank’s RoA, which has consistently ranged from 1.9% to 2.1% over the last decade, suggests its capacity for resilience and growth in the years ahead.
