So, why aren't you exploring international markets?" a curious analyst posed to Paresh Sukthankar, Deputy Managing Director of India's second largest private bank, HDFC Bank. "There are interesting emerging markets, which are investment grade," reasoned the analyst. This question, in a postresult conference call, was a bit easier to handle for Sukthankar, whose boss Aditya Puri - MD of the bank - was not at the conference. The bank's strategy all through has been to exploit the huge business opportunity in the domestic market, and going overseas never fascinated its management. It has been proved right time and again, when those who expanded overseas had to beat a hasty retreat. Also, banks that grew at a fast pace without studying the risks had to contend with far lower loan growth in the post-2008 period slowdown. Good times or bad, HDFC Bank has assured growth upwards of 20 per cent in its loan book, revenues and profits, with the lowest non-performing assets (NPAS). This performance feeds into the BT500 study, where the bank has shown the highest growth in market capitalisation across industries.
In the past two decades, HDFC Bank has perfected its business model of consumer banking, SMES and corporate banking with a focus largely on working capital loans. It is now creating new growth engines. It has expanded in a big way into rural and semi-urban areas with a product suite comprising Kisan gold cards, loans for two-wheelers, light commercial vehicles, tractors, jewellery, etc. Currently, more than half its branches are in this geography. Its big challenge is to increase the revenue contribution from these branches from 15 per cent currently. It had earlier set a target of 35 per cent, but that would take some time. There are close to a dozen small finance banks that would make their debut in the next one year. These specialised banks will come with a low-cost model to give banks like HDFC a run for their money. Sukthankar isn't perturbed: "Some of these players are already operating (competing with us) in these geographies as NBFCS. So, their presence probably would increase in the liabilities side (deposit raising) under the banking platform."
In urban areas, the bank faces newer challenges, especially on the digital side, as younger customers are increasingly using digital wallets and prefer faster processing of loans. It has been early in putting resources into data warehouses, data analytics and mobile-based offerings. In consumer banking, the bank is known for processing a personal loan for existing customers in just 10 seconds. Other private banks are not far behind - Axis Bank, Kotak, Yes and IndusInd Bank are fast spreading their wings in retail banking. Then, there are the Paytms of the world and NBFCS as well. Paytm has done well in converting many cash transactions like paying taxi fares into digital wallets. Similarly, Bajaj Finance has instant loan approvals in the consumer durable segment, where banks are still to make headway. Experts suggest the new payments banks that are allowed to accept deposits with transactions/payment facilities would disrupt the existing banks.
HDFC Bank's pain point is clearly the ability to mobilise low-cost deposits, especially current account and savings account (CASA). Ever since RBI deregulated the savings rate, which was earlier pegged at a maximum of 4 per cent, banks with low base of CASA have been offering a higher interest rate of 5-7 per cent to get market share. But big banks with huge deposit base have stayed away from offering higher rates as it would increase their cost of funds and margins. "The new banks are paying interest rate as high as a fixed deposit rate for CASA deposits and hence there is no big impact on the cost of funds," says an analyst. HDFC Bank's CASA has been on a gradual decline over the past few years - from 48.4 per cent in March 2012 to 43 per cent in March 2016. "Our fixed deposits have grown much faster than the CASA deposits," says Sukthankar. One of the reasons was also the FCNR deposits mobilised by the bank three years ago, when the RBI under Raghuram Rajan opened the overseas window. In the emerging banking landscape, there will be a scramble for CASA deposits.
There are other challenges, too. HDFC Bank has become a talent poaching ground for new players like IDFC Bank and even older ones like Yes Bank, a trend that is likely to accelerate. But Sukthankar is unperturbed: "We have strong enough bench strength at every level." Then, Puri has just a few years left to reach the retirement age of 70 years. The market is already taking about "After Puri, who?" But here, too, the bank has a plan. "There is a successor... there are two-three levels below me, so don't worry," Puri had said sometime ago.
Today, HDFC Bank has emerged as a more valuable bank than global biggies like Deutsche, Barclays, DBS, and Credit Suisse. Given the sluggish global growth, the bank - with 20 per cent-plus growth - would surely move up the ladder in global market cap rankings. Why go global when you can create the most valuable bank in the world in India itself?
This also partly answers the analyst's query.