Akash Jain
HDFC Bank is our top pick in private banking space and our structurally bullish on it for next 10 years as well. We prefer HDFC Bank over its peers owing to better governance, strong asset quality and high return on asset.
We believe HDFC Bank is a must for every long term investor to be in its portfolio. The bank rightly deserves premium valuation as return on asset and return on equity more than industry benchmark and is always improving.
Going back to value investing basics and replicating value investing methodology of Warren Buffet, HDFC enjoys all the features of being a “Good” company which are as follows:
a) Nature of business is subject to moderate changes like to deal with RBI measures such as CRR, repo rates etc.
b) It enjoys steady competitive advantage
c) Brilliant management quality with good corporate governance
d) Business growth above industry benchmark
e) Attractive ROA of 2 percent.
The bank has performed consistently well over the last 10 years. Even Q4FY18, was in line with our expectations amidst other peers reporting rise in NPAs.
In Q4F18, strong credit growth of 22 percent was driven by retail loans of 30 percent, whereas corporate loans grew by only 8 percent. Higher growth is seen in unsecured retail segments; however we are not unduly concerned given the strong management experience and capability.
Unsecured retail segment is currently 16 percent of total loans. NIMs were stable sequentially at 4.3 percent. Management guides it to be in range of 4.1-4.4 percent.
The bank boasts of robust asset quality with sequentially stable GNPA as well as NNPA at 1.3 percent/0.4 percent respectively. GNPAs are around 1 percent consecutively for each of the past eight years, whereas restructured loans were miniscule.
It has marginal exposure to only two accounts of the forty accounts mentioned by the RBI. Its CASA deposit franchise is strongest among peers. Slippage for the quarter stood at 1.7 percent. PAT witnessed a YoY increase of around 20 percent in Q4FY18 to touch Rs 4799.20 crore.
The company witnessed healthy financial performance in FY18 with retail loans rising by 27.4 percent YoY and wholesale loans registered a yearly growth of 9.4 percent.
What was heartening to see that the company has reduced its cost/income ratio to 41 percent in FY18 owing to various initiatives like automation of processes across lending, branch banking, operations etc. leading to higher efficiency.
Disclaimer: The author is Vice-president, Equity Research at Ajcon Global Services. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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