Why HDFC Bank is Poised for Massive Growth: Key Insights

HDFC Bank, the second-largest bank in India. It is set for robust growth driven by improved profitability, sustainable deposit growth, and strategic investments in technology. The bank’s focus on retail assets and replacing high-cost borrowings with deposits will boost margins. Despite near-term challenges, HDFC Bank’s strong fundamentals and attractive valuations are looking great. Me as a long term investor is watching HDFC Bank very closely.HDFC Bank is the India’s second-largest bank after SBI. The total size of the bank’s financial holdings is approximately Rs 36 trillion following its merger. It means, the total assets held by the bank, which includes items such as cash, investments, loans, and other assets is worth this value.As of March 2024, the bank operates about 8,738 number branches and 20,938 ATMs across 4,065 cities in India.Its key subsidiaries after merging with HDFC Ltd. include HDFC Life, HDFC ERGO General Insurance, HDFC AMC, HDB Financial, and HDFC Securities.Looking at the HDFC Bank from a long term perspective (5+ years), I’ll consider increasing my holdings in HDFC Bank Limited. I will look to buy more of it at a price of around Rs.1650 per share. Currently the share is trading at Rs.1730 levels.Future GrowthThe HDFC Bank’s management seems to have identified the strategic initiatives necessary to drive long-term growth. These include enhancing profitability metrics such as Return on Assets (RoA) and Earnings Per Share (EPS). How they are planning to achive it?They will do it by ensuring sustainable growth in deposits, particularly in the retail segment. They are also investing in distribution, workforce, and digital infrastructure.HDFC Bank has consistently delivered robust and reliable performance in the past years (FY22 and FY23 being an exception).This historical track record of the bank has proved that it has effectively managed economic cycles, maintained profitability, and possibly outperformed industry peers. Its past growth rates, return on assets (RoA), and earnings per share (EPS) has outshined its peerts.This type of consistency builds investor confidence in the bank’s ability to continue delivering strong results in the future. It seems that the level of operational stability (post merger) is coming back, the stock is ready to deliver now.HDFC Bank can achieve significant growth, projecting a CAGR of 15% in advances, 18% in deposits, and 18% in earnings from FY24 to FY26.Alongside, an expected RoA improvement to approximately 1.8% by FY26 from 1.6% in FY24 is also possible.Focus on Deposits & Loan-Deposit Ratio (LDR)HDFC Bank want to expand its market share. But as a all great banks do, they do not want to do it at the cost of decreased margins. Hence, the bank is focusing on deposit growth so that the cost of funds (COF) remains under acceptable limits.The Bank wants to use its established reputation and customer base to attract more people to deposit their money with them. They plan to do this by making sure customers are more involved and satisfied. How they plan to do it? By providing excellent service, and encouraging customers to use more of their banking services. All these steps are taken to ensure that their deposits grow steadily over time.The Bank is focusing on gathering smaller deposits from many customers. At the same time, they want to offer competitive interest rates to attract more deposits compared to other banks. This way they will have enough cash (deposits) which will replacing higher-cost loans from HDFC Ltd. This money will be used to invest in projects that help the bank grow.As deposit growth is expected to surpass credit growth, a noticeable improvement in the Loan-to-Deposit Ratio (LDR) is projected over the medium term (0.89 last 14-Year average). As per Mar’24 numbers, the LDR is currently at 1.08 levels.DescriptionAdvances (Loans)DepositsLDRMar-111,60,831.422,08,287.210.77Mar-121,98,837.532,46,539.580.81Mar-132,47,245.122,96,091.770.84Mar-143,15,418.863,67,080.330.86Mar-153,83,407.974,50,283.650.85Mar-164,87,290.425,45,873.290.89Mar-175,85,480.996,43,134.250.91Mar-187,00,033.847,88,375.140.89Mar-198,69,222.669,22,502.680.94Mar-2010,43,670.8811,46,207.130.91Mar-2111,85,283.5213,33,720.880.89Mar-2214,20,942.2815,58,003.030.91Mar-2316,61,949.2918,82,663.250.88Mar-2425,65,891.4123,76,887.281.08NIM ImprovementIn the coming quarters there will noticeable but gradual improvement in NIMs. At present it is at 3.21 which is almost 18% below its last 14-year average of 3.8.Shifting towards more retail assets and replacing costly borrowings from HDFC Ltd. with deposits are crucial steps to enhance margins (NIMs).As some high-cost borrowings from HDFC Ltd. mature in FY25, there’s potential for further margin improvement. However, short-term challenges related to higher Cost of Funds (CoF) may restrain NIM expansion. Till Q4FY24, its likely to remain at 3.4 levels.ValuationAs FY24 ended, the bank saw stronger deposit growth, although credit growth was slower due to a focus on increasing deposits.Going forward, sustained efforts in deposit mobilisation and improvement in Net Interest Margins (NIMs) and Return on Assets (RoA) will be crucial for the stock’s revaluation.I personally find valuations of HDFC bank attractive at Rs.1650 levels. Looking at this stocks from a very long-term holding perspective, I’ll likely buy this stock if it falls in that range. I’m anticipating an substantial NIMs and RoA improvement.Have a happy investing.