What’s HDFC Bank’s success secret?

What’s HDFC Bank’s success secret?

When reports surfaced in July that Indian newspaper publisher Deccan Chronicle Holdings was struggling for survival, several of its creditors were caught off-guard. Not HDFC Bank. Even as Deccan, which also owned a glitzy cricket team, sought to reassure markets that it held enough assets to stave off a crisis, HDFC Bank was busy getting rid of the loans extended to the group, three sources with direct knowledge of the matter said. That agility paid off: Deccan has since lost its cricket franchise and its lenders, including heavyweight ICICI Bank, Axis Bank and a dozen others, have been left with bad loans totalling $750 million. “Alertness and the ability to pick early signs of problems have helped,” Paresh Sukthankar, executive director at HDFC Bank, said in an interview, pointing to the bank’s low bad loans of 0.9% of its book compared with 4.2% expected for the industry by March. At a time when lenders across the world are battling slowing growth and rising loan defaults, HDFC Bank’s conservative business model and its knack of delivering returns are proving unique, and offer a lesson for its hard-pressed competitors. HDFC Bank has posted profit growth of over 30% every year for the last decade, richly rewarding its investors. Since 2008, HDFC Bank’s shares have risen nearly 87%, while rival ICICI is down about 16% . Trading at five times its book value, HDFC Bank is the world’s most expensive lender and is among 15 banks globally to trade at a premium to its intrinsic value — a measure of how much shares should be worth when considering expected growth rates over the next decade. So what is the secret sauce? Selective lending, diversified exposure and focus on low-cost savings deposits, Sukthankar said. It has also shunned risky, exotic products and is picky about its borrowers. “We live in a volatile world,” said Sukthankar, who has worked at the bank since its inception after moving from Citigroup Inc. “We don’t chase higher yields and run into higher risks.” The lender expects non-performing loans to remain within its five-year average of 1.3-1.5% . For all its success, HDFC Bank faces stiff competition. With the central bank planning to issue new banking licences, the landscape could become even more competitive for HDFC Bank, putting pressure on its margins, analysts say. Its net interest margins — a key gauge of bank profitability — now stand at more than 4% , one of the sector’s highest.