It’s only sensible to worry about numbers like these–they’re just so deliciously good. For the last 10 years, India’s HDFC Bank has been able to grow its loan portfolio by 31% annually. It’s deposit base has expanded at almost the same rate, 29% annually. That combination has enabled the bank to average a net interest margin of 4.7% over that period.
But India’s financial system is going through a digital revolution as online banking–often using cell phones–grabs a bigger and bigger share of the market. It’s only reasonable to worry if that revolution will hurt HDFC Bank’s growth trends.
It doesn’t seem like it. The bank is using its advantages of scale to continue to build out 200 to 300 branches annually in urban and rural areas while employing a digital strategy to bring even more customers into the fold. In fiscal 2016, for example, 30% of personal loss originated in the online channel. Other products saw about 20% of their business go digital. In fact there’s some evidence that the move to digital is helping the bank build an even larger presence among India’s growing middle and professional classes that have moved most strongly to smart phones. These groups have been the bank’s long term market target and cross-selling new financial products to these customers remains a key goal for the bank.
The bank has been able to reap that growth while emphasizing making new loans to customers who have paid back existing loans and in expanding deposits from customers who are already familiar with the bank. That has let the bank build a 6.4% market share of deposits in India, making the bank the largest private bank in the country and ranking it with some of India’s public banks. This growth strategy has also enabled HDFC Bank to show a low 0.6% level of nonperforming loans.
The ADRs are a member of my long-term 50 Stocks portfolio. Long-term investors should note that the bank has shown an average 18% return on equity over the last three years versus a cost of equity of just 12% in that period.
The ADRS are up 577.6% since I added them to the 50 Stocks portfolio on December 30 , 2008.