Inspired HDFC Bank leaves others behind: Here's why

At a time when interest rates are firming up, very few are upbeat on banking stocks. To take it a little further, no one expected some time ago any stock from this sector coming anywhere close to its all-time high. HDFC Bank may just be an exception. It not just touched a high of Rs 2,509.90 in the first session on Thursday, but is now close to its record high of Rs 2,518 scaled on October 4, 2010.

[caption id=“attachment_34900” align=“alignleft” width=“380” caption=“HDFC not just touched a high of Rs 2,509.90 in the first session on Thursday, but is now close to its record high of Rs 2,518 scaled on October 4, 2010. Fayaz Kabli/Reuters”]  [/caption]

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While the macro scenario is the same for all other banks, it’s only HDFC Bank which has put up a better show than others. Bank Nifty, the banking index which is traded on the NSE, is trading at 11,153 compared to its peak of 13,303, a fall of nearly 16% from its high. This, however, does not provide the correct picture of other banks. SBI, for instance, is trading at 68% of its peak value. The stock hit a high of Rs 3,515, but currently trades at around Rs 2,420. Oriental Bank, the other public sector bank, is down 60%, at Rs 330 from Rs 545.

So, what is making investors flock to HDFC Bank? In its annual report analysis, Motilal Oswal says HDFC Bank has reported its slippage ratio - defaults as a percentage of opening loans - of 1.1% in FY11, its lowest since 2005. Slippages as a percentage of average loans fell to 1% in FY11 from 2.3% in FY10.

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Improvement in risk management and focussed retail strategy were instrumental in pushing the slippage ratio down. In a rising interest rate and inflation scenario, this is definitely creditable. A change in interest rates impacts slippage ratio of banks negatively. Higher interest rates and surging inflation erode the ability of households and small and medium enterprises to repay loans. This, in turn, escalates risks of defaults and a rise in non-performing assets and the slippage ratio.

HDFC Bank’s focus on retail can be seen from the fact that retail savings deposits grew 28%, retail loans 26.8% and savings account/debit cards 18% in FY11. The branch strength went up 15% and ATMs 30%. The report mentions that 70% of the bank branches are outside the top nine cities in the country.

As an affirmation of sorts, RBS had raised the target price of the bank, post its annual report research. Return of Assets (RoA) of HDFC Bank, at 1.8%, is the highest among other Indian banks it covers. According to its report, well-balanced asset liability maturity profile, high current accounts and savings accounts (CASA) and low deposit concentration compared to its peers make HDFC Bank stand out.

The management of HDFC Bank sounds optimistic about loan growth and expects it to remain stable at 25% without yielding any ground on the net interest margin. At the recent India Investor Conference organised by Citi, the management reiterated the bank’s thrust on rural markets for long-term growth and priority sector lending. The bank is sitting pretty on the capital front. This explains why it feels that there is no need for dilution, as is the case with some of its rivals. Its assets are doing good and the delinquencies are likely to remain low.

It is this strong show of the bank compared to its peers that is reflected in the market.