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Consumer Loans Drive Bottomline

HDFC Bank has managed to create massive wealth by focusing on retail banking, especially auto, gold and education loans. Expansion in rural markets helped in scaling up further

Consumer Loans Drive Bottomline

Aditya Puri, Managing Director and Chief Executive Officer - Photograph by Rachit Goswami

The best of our bank is yet to come," wrote Aditya Puri, Managing Director and Chief Executive Officer of HDFC Bank in his farewell message to shareholders. The 70- year-old ex-Citibankers words carry a lot of weight in the market - after all, in the past two-and-a-half decades, Puri had built a bank with market leadership in products, including car loans, credit cards and personal loans from scratch. The bank has one of the biggest and the strongest balance sheets in the industry with a size of Rs 15.30 lakh crore, only next to the country's largest lender, State Bank of India.

The private bank promoted by mortgage lender HDFC Ltd under Deepak Parekhs guidance reported a net profit of Rs 26,257 crore in FY20, more than its parent at Rs 22,826 crore. The asset quality, a barometer of lending, is the best in the financial services sector. Its market valuation at Rs 6.14 lakh crore is only next to Reliance Industries Ltd (RIL) and TCS. Investors are laughing all the way to the bank. For instance, Rs 1 lakh invested in 2015 is now Rs 1.89 lakh.

In the last five years, the bank has more than doubled its balance sheet, advances, retail assets and profits. The focus has been on consumer banking where net NPAs have been the lowest at less than 1 per cent. Retail banking today constitutes over 50 per cent of the bank's total advances. The share of large corporates in loans and advances is less than 15 per cent. In fact, the strategy to focus on working capital loans instead of long gestation project loans has paid rich dividends as other banks got mired in non-performing assets (NPAs) in steel, power, telecom and other sectors in the last five-six years.

The biggest growth engine has been the retail segment with a book ofRs 5 lakh crore, especially auto, gold, agri and education loans. The bank didn't get into home loans which parent HDFC does more efficiently. The bank simply sources business for HDFC for a fee. The high-yielding credit card and personal loan business was scaled up by first offering loans to existing customers. On the liabilities side, the bank aggressively tapped the low-cost retail deposit segment instead of wholesale deposits, which are costly. Currently, CASA is close to 50 per cent of the bank's total deposits and cost of funding is 5.0 per cent. The low cost of capital offers a competitive advantage for the bank in businesses such as auto loans, where margins are relatively low.

"In the last decade when most banks were grappling with asset quality issues, HDFC Bank actually created wealth for shareholders," says S. Ranganathan, Research Head, LKP Securities, a Mumbai-based securities firm.

The ground for future growth was laid long back. Much before digital banking became imperative, the bank had laid the foundation for initiatives in the online banking space. The biggest hurdle, regarding the succession of a long-standing CEO, has been passed, with insider Sashidhar Jagdishan, Group Head and Strategic Change Agent, set to take over from Puri in October.

The bank is betting big time in rural and semi-urban areas, where it has half of its branches. "We have a 10-year track record of presence in rural and semi-urban markets. There is a huge runaway there for growth in liabilities and assets," Jagdishan said during his first interaction with analysts last week after getting the top job.

The bank has also taken a lead in transforming into a digital bank in the last five years. "The strategy is to build scale on the capability of the bank's existing digital platforms and collaborate for customer acquisitions," Jagdishan said. In the payments space, the bank has built a strong base of card holders and merchants. Its focus is to bring small merchants, including kirana stores, into the formal banking system by digitising their payments solutions. Lending, too, is taking place digitally with 10-second personal loans. Branch banking is being transformed into a financial marketplace backed by Artificial Intelligence (AI)-led Big Data Analytics to address customer needs and cross-sell products.

Jagdishans big challenge will be to compete with the likes of Bandhan Bank and small finance banks in rural markets. These players with a differentiated business model of lending to the unorganised sector (at a slightly higher rate) are giving a tough competition to full-scale banks in the liabilities or deposit market with higher interest rates. "They will have competition, but the bank has a bigger balance sheet and network. In addition, the bank is much more digital than small finance banks," says Rajin Ranjan , Research Analyst , Geojit Financial.

"New payment and fintech companies will pose strong challenges in the digital banking space," adds Jitendra Upadhyay, Senior Equity Research Analyst, Bonanza Portfolio.

HDFC Bank has always had the first-mover advantage. Puri recently said Covid crisis opened new ideas for the bank, especially being efficient while working from home, readying for tomorrow via e-learning and leveraging the opportunity to further its digital agenda.

The market will keep a close watch on developments at the bank. Jagdishan is expecting normalcy in consumer spending, asset product sale, disbursal and collection to start from October onwards. That is also the time when he will occupy the corner room. Investors, meanwhile, have high hopes.

@anandadhikari

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