Beyond the Numbers: Unveiling the Story of HDFC Bank.

How a Bank with 0 Negative Analyst Reports in 10 Years is underperforming wildly? This is a story beyond numbers.

Nilesh Shah, MD Kotak Mahindra AMC, once said, " Why to go and find the next HDFC Bank when, HDFC bank is creating a new HDFC bank in every 3-4 years". These are the words which describe the quality, strength and future prospects of a strong company.

Yet, the market seems to be telling a different story. The same bank is beaten heavily by the market since past 3-4 years.  Let's unravel this conundrum.

Time Period	Absolute Returns	CAGR
1M	(-3.64%)
YTD	(-16.55%)
6M	(-10.85%)
1Yr	(-13.61%)	(-13.61%)
2Yrs	(-6.30%)	(-3.19%)
5Yrs	35.51%	6.28%

Nifty 5Yrs CAGR - 15.35%

Despite HDFC Bank's consistent growth, its returns have lagged behind the Nifty50 index by a significant margin. This deviation raises eyebrows, considering the bank's stellar financial performance.

(For now, we will check pre-merger earnings for understanding.)

	FY2018	FY2023	5-year CAGR
Revenues	85,228	170,754	14.89%
Earnings	18,561	46,149	19.98%
EPS	35.66	82.44	17.89%

Let's talk numbers -

• The bank has been maintaining a healthy ROA of 1.93% since last 3 years.

• Company has a good Return on Equity (ROE) track record: 3 Years ROE 16.76%.

• The company has been consistently maintaining a NIM of 3.74% since last 3 years.

• The Bank is prominently managing its Non-Performing Assets, Average NET NPA of last 3 years is 0.33%

• CASA stands at 44.39% of total deposits.

• Good Capital Adequacy Ratio of 19.26%.

• The company has delivered good Profit growth of 18.88% over the past 3 years.

Examining earnings paints a similar picture of strength. Over the years, HDFC Bank has showcased impressive revenue and earnings growth, coupled with healthy metrics.

So, what's driving the underperformance?

One plausible explanation lies in valuation.

P/B is the right metric to track the valuations for Banks.

With the peak made in 2018, the P/B has been correcting ever since with rise in Book Value as seen.

The argument here is that PSUs governance issues are now declining and hence there shouldn't be this wide premium gap given to Private Banks. I agree partially on this opinion, because cleaning of PSUs have strengthened their balance sheets and position in the economy. But we are yet to go through a downcycle, and we are yet to see their performance during that time. Also, this hasn't slowed HDFC Bank, its net advances grew by 58% compared to ICICI (18%) and Axis (23%) recently.

Post it's December quarterly results, HDFC Bank had a steep correction where it fell by 15% within 3-4 days.

HDFC Bank - ADR (NYSE)

The reasons for this decline were stated as follows -

• Fall in Net Interest Margin (below 4%)

• Shift from CASA (Current Account, Savings Account)

• Rise in Cost of Funds

• Rising short trades for HDFC Bank.

• Delay in synergies for HDFC-HDFC Bank merger.
  

Decline in Net Interest Margin for HDFC Bank

Decline in NIM - HDFC Bank

Decline in NIM - HDFC Bank

Let's deep dive -

• Mergers of this size and scale typically take time for the full synergies and efficiencies to be realized, which has been acknowledged by the management. Although, the plus point here is, this huge merger is happening for companies with similar culture and foundation, so this seems like a temporary issue.

• Furthermore, macroeconomic factors such as rising interest rates pose additional headwinds for financial institutions, impacting their profitability. HDFC Bank's transition to new leadership further adds an element of uncertainty.

• We need to understand one thing, that HDFC Ltd was a low margin segment as it was majorly operating in the housing segment plus their borrowings were from Bond Market. Now HDFC had around 5 lakh crore borrowings which HDFC bank can substitute through new deposits which relatively costs lower. But to attract this huge deposit, HDFC Bank has to give slightly higher interest rate, which we can now see is affecting its margins.

For investors with a long-term view, the current valuation correction could present a buying opportunity in one of India's most established and systematically sound financial institution. However, near-term performance will likely depend on the successful transition of this combined entity.

The key is to acknowledge valid market concerns in a balanced manner, while emphasizing HDFC Bank's intrinsic strengths and long-term orientation over short-term fluctuations.

Let's now analyze beyond numbers -

Chart 1 -

Google Ngram Analytics - HDFC Bank

Following analytics showcases, that the term HDFC Bank has got a renewed interest from web surfers' post 2012 and is in a strong uptrend (unlike the stock).  Not directly related to analysis, just a metric to track.

Chart 2 -

Number of Analyst Reports

Chart 3 -

Calls by Analysts

Charts 2 & 3 are showcasing the rising coverage by analysts for the company. More the merrier as we get a holistic understanding of the estimates.  Notably, the absence of negative analyst reports over the past decade speaks volumes about the bank's reputation and resilience. (If you get a sell report on HDFC Bank, please send it to me).

Chart 4 -

Chart 5 -

I don't exactly have any back testing for this theory, but currently I believe many retail investors are holding this stock (which I am stating due to dramatic rise in shareholders since 2020) and as a result there is no strong force prevailing which will propel the stock upwards.

But one thing I know is that smart money makers will buy this stock at a discount when average retailers lose patience for this company, plus I don't see any structural problem in the company. But till then this can be ITC 2.0.

Disc - Views are purely personal and does not represent any organization.

Not an investment advice, purely for educational purposes.

Co-Author - Parth Deshpande

Sources -

Tijori, Google, Screener, Trendlyne, HDFC Bank.