An Emerging Indian Banking Giant

03/17/2008 12:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor in chief of Growth Report, says HDFC, the second largest private bank in India, is growing rapidly and has big ambitions in the years ahead.

HDFC Bank  (NYSE: HDB), based in Mumbai, is India's second largest private sector bank and one of the nation's biggest consumer lenders. HDB's banking business and branch network is focused in India, one of the most attractive and fastest growing banking markets in the world due to its large population, growing deposit base, and strong projected economic growth.

As of the end of 2007, HDFC Bank had over 750 banking centers, a 60% increase since 2006, that serve some 9.6 million customers. Its network includes over 1,800 ATMs, which span over 325 cities and towns. The company has focused on India's "unbanked" regions (nearly two-thirds of its branches are located outside the country's nine most populous metro areas).

While its retail-banking segment primarily serves middle- and upper-class customers, HDFC has made great inroads into the area of microfinance (lending money to the poor) by providing small loans, often only a few hundred dollars, to low-income but credit-worthy rural borrowers: roughly 30% of India's 1.1 billion people live below the poverty line.

The wholesale banking segment, which provides commercial loans and transaction services, counts six out of ten Indian brokerages as account holders. The bank plans to enter the highly competitive and hugely profitable investment banking business.

HDB is also expanding its horizons beyond India's borders: it will be opening international business branches in the Asian business hub of Hong Kong and the Middle East financial center of Bahrain.

HDB's consistency and growth has been nothing short of extraordinary. Over the last seven years, the Indian bank has expanded its revenues, assets, and deposits, realizing growth (averaging 30%) for 32 consecutive quarters. Its customer base has grown 685% since 2001. Its debit and credit card business has climbed 86% and 380%, respectively, over the same period.

In January 2008, Standard & Poor's assigned HDFC its “BBB-” long-term and “A-3” short-term credit ratings and gave the bank a “C” bank fundamental strength rating, noting HDFC's "sound management" and "strong market position in the domestic banking industry, good financial profile supported by strong earnings, healthy capitalization, good loan quality, and diversification."

HDFC's nonperforming loans stand at 1.2%, a lower rate than many Western financial institutions, and the bank has a capital adequacy ratio of 13.8%, 4.8% above the 9% requirement set by India's central bank.

Analysts are expecting another great year for fiscal 2008, [ending in March]. Revenues are expected to increase 26%, [while] earnings [are] estimated to be $3.60 a share, growing to $4.56 in 2009. Trading at 25x forward earnings appears rich, but considering the company’s growth and the foreign exchange benefits, this multiple is cheap. We expect to see the stock once again trade at 30x forward earnings, which would result in a target price of $138. (The ADRs closed around $95 Friday—Editor.)

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