HDFC Bank Ltd’s Journey to becoming the crown jewel of India’s Private Sector Banks

Given this feat, it would come as no surprise that HDFC Bank is also the largest bank in India by market capitalisation and is a favorite pick for market participants.

It’s position today, as a market leader in the banking sector is mirrored in the performance of its stock over the years. Here’s a lock at how the HDFC Bank Ltd. stock has fared in the last decade.

Of all the Big Four Banks in the country, how did HDFC manage to rise to the top? It’s closest competitor in terms of Market cap, i.e. Kotak Mahindra Bank, is valued at ₹3.7 Lakh crore, which is less then half the value commanded by HDFC. It’s shares were trading at  about ₹210 in January 2011, while it trades at about ₹1,488 today (January 2021). That’s a 600% increase in over 10 years! To put such growth into perspective, we must look at how HDFC steered itself into the market leading position that it is in today.

Going Steady

As a bank, HDFC is known for adopting a pace that is slightly higher than the market average and goes steady. This is how the bank has been run since it’s inception in 1994 and continues to run today. Between 2011 and 2013, the share price climbed steadily from ₹205 to ₹334. No major spurts or downturns were witnessed during this time period, the charts look surprisingly tame for a company of this size.

As the new decade (2010s) was ushered in, HDFC had already acquired a reputation for being one the best run banks in India. Aditya Puri, who was MD at this point, was known to have established a culture of professionalism that continues to shape public perception of HDFC even today.

HDFC has always targeted the base of customers who would be inclined to open a current account/savings account (CASA). While this sounds simple and intuitive, this isn’t a trend that many caught on to until HDFC has already started implementing it. Even by 2011 standards, HDFC offered some of the most attractive incentives to it’s CASA account holders in the form of platinum cards, free insurance, cashbacks etc.

This relentless focus on architecting an enhanced custoer experience coincided with the rise of India’s middle class and enabled HDFC to capture a lion’s share of the CASA market. A good chunk of it’s growth till 2013 was underlined by it’s sustained efforts towards acquiring more and more customers to open their accounts with HDFC. A driving force behind this was to foster partnerships with various corporate houses have a salary account for employees.

Leveraging Existing Strengths

By the time 2013 had ended, HDFC’s measured and consistent approach towards growth could be observed in it’s share prices. Trading at a measly ₹322, HDFC would soon come to reap the benefits of compounding. It closed 2014 at  about ₹470 and would go on to experience a rally that would see the price soaring to nearly ₹600 towards the end of 2016.

During this period, a few other practices that HDFC followed came to the forefront. A primary suspect in this rally was HDFCs enviable lending model that had managed to keep NPAs low despite growing at the pace that it did. One way in which the company had managed to achieve this was by building on top of the relationships it had built with it’s retail customers.

Corporate houses as well as individual account holders (a demographic cohort that HDFC has already wooed over) were being extended loans that were commensurate with their aspirations and lending capacities. With a base that constituted the wealthiest decile on the country’s population, HDFC was in a unique position to profit off of ‘risk-free lending’.

HDFC’s loan approval process was also not riddled with red tape and faciliated the disbursal of loans in a quick manner while taking great care to not be reckless (unlike it’s peer Yes Bank). With long-term corporate clients, they went a step further and had put in place fast, pre-approved loans that only expanded it’s loan books.

Defaults tended to be low and the interest income from these activities were high.

Since this practice was underway for quite some time, HDFC began to bloom into a unique banking entity that was able to expand it’s asset values while keeping the ration of NPAs low. In fact, HDFC distinguishes itself from its competitors by way of its excellent risk management system. Careful lending and an efficient recovery system has enabled it to be a star performer in this area.

Reaching stratospheric heights

Come 2017, HDFC had begun to stand out from it’s competitiors on almost all fronts. It had anticipated the wave of tech-driven banking and had already invested heavily in ensuring a superior tech-driven banking experience that pleased customers even more. It was one of the first companies to offer a refined ansd superior net-banking experience and other nifty billing facilites to it’s customers.

On September 2017, HDFC was added by the RBI to an elite list of lenders that were deemed to be India’s domestic systemically important banks (DSIB). In other words, HDFC was deemed to be too big to fail. Being the third bank to make it to this list after SBI and ICICI, HDFC’s stock was trading at close to ₹900 now.

Since then, HDFC has never looked back and has only continued to grow at a breakneck pace and has acquired many awards and praises along the way for it’s operational and managerial efficiency. Despite a small downturn as a result of the Covid-19 pandemic, HDFC has continued to grow at a steady and undeterred pace. As of the time of writing this article, HDFC stocks trade at nearly ₹1,500, proving it to be a company that has consistently provided immense value to it’s shareholders.

Conclusion

HDFC’s 26-year journey to become India’s most valuable bank is packed with lessons and insights that is valuable for anyone who participates in the financial ecosystem. Some of the core tenets that define HDFC’s journey are:

1. Consistency: HDFC’s strategy has always been simple. Grow slightly faster than competitors, but adopt a pace that is sustainable. This allows for the force of compounding to kick in, thereby propelling growth even further.
2. Bucking the Trend: HDFC realised fairly early that the greatest opportunities lie in the collective enrichment of the Indian population. They responded by building solid relationships with corporate houses and customers, which has paid off handsomely.
3. Risk Management: This is perhaps the most distinguishing feature of HDFC. Despite registering immense growth, the share of NPAs has been very low. Being prudent with loans and avoiding massive risks has been a motto for the bank.
4. Technology: HDFC invested in technology much before their peers to provide a solid banking experience for it’s customers. This furthred it’s reputation for being a customer-first bank.