October 24, 2017 / 7:39 AM / 5 months ago

BREAKINGVIEWS-Indian lender becoming world’s biggest little bank

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

MUMBAI, Oct 24 (Reuters Breakingviews) - HDFC Bank is punching above its weight. Amid fast income growth, shares of India’s largest private-sector lender have soared around 50 percent this year. Its market capitalization of nearly $90 billion towers over some global peers despite a balance sheet that is minuscule by comparison. Yet the plight of weak state-controlled rivals means this giant may get bigger.

The bank led by Aditya Puri delivered another strong set of results on Tuesday, with net income surging 20 percent in the quarter ending Sept. 30. Its mix of auto, home, agricultural, and other loans represent about 6 percent of the national total, but HDFC has chosen customers wisely. Late or defaulted loans are just over 1 percent versus 10 percent across the banking system, according to data obtained by Reuters using a right-to-information request.

This has enabled HDFC to keep lending even as India’s economic growth has been slowing. New Delhi is letting smaller state banks shrink instead of bailing them out from under bad infrastructure and project-finance loans. HDFC accounted for 35 percent of incremental credit growth during the previous quarter, analysts at JD Financial estimate.

It helps explain an eye-popping valuation. HDFC, with a return on equity approaching 20 percent, fetches more than four times book value while State Bank of India trades at a discount to its own. U.S. regional lender Fifth Third, whose balance sheet is similar in size at around $140 billion, trades at a little over book value and is worth less than a quarter as much. And HDFC’s market value is the same as Barclays and Royal Bank of Scotland combined.

Part of that is down to HDFC’s appeal to overseas investors eager to bet on India with few healthy financial options from which to choose. The heady growth brings risks, however. HDFC is pushing into new areas and extending more credit to the poor and self-employed. The proportion of unsecured retail loans is gradually rising, too.

Even so, management’s track record and the woeful state of larger rivals mean HDFC deserves the benefit of the doubt. If, as Macquarie analysts were projecting before the latest results, the shares could rise another 20 percent, HDFC’s place would be cemented as the biggest little bank in the world.

On Twitter twitter.com/ugalani


- HDFC Bank, India’s largest private sector lender, on Oct. 24 reported net profit of 41.5 billion rupees ($634 million) for the quarter ended September, a 20 percent increase from a year ago.

- The bank’s shares have soared more than 50 percent this year, more than twice the rise in the benchmark Nifty 50.

- HDFC’s $87 billion market capitalization makes it India’s second largest listed company after Reliance Industries.

- For previous columns by the author, Reuters customers can click on


Editing by Jeffrey Goldfarb and Katrina Hamlin

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