Abhinesh Vijayaraj, Equity research analyst, Spark Capital Advisors

HDFC Bank’s track record over the past two decades demonstrates it’s the best lender in India. Systems and processes are deeply ingrained, which help the lender function smoothly. Even with attrition at the top management level, the bank hasn’t been impacted adversely. While we believe that loan book growth of the banking system will slow down over the next two years, HDFC Bank is an outlier with its loan book growing at 19% despite its size, and will continue to clock 14-17% growth. Also, over the next ten years, it will be driven by retail loans, especially credit cards and personal loans. The credit card segment is highly profitable as its RoA is the highest amongst comparable products. The bank’s profitability is also expected to increase, aided by 200-300 basis points improvement in cost-to-income ratio. We are comfortable with the valuation as the price/book value has corrected from 4x to 3x on a forward basis. So, the slowdown in the loan book growth and macro headwind are already factored in. 

Hemindra Hazari, Independent research analyst

It appears that HDFC Bank has successfully generated higher business through reengineering its processes, and its digital strategy has contributed to this achievement. It has been able to sweat its labour force and existing infrastructure to achieve higher business. However, the critical issue remains whether the bank can continue with this strategy of leveraging its operating cost. In a faltering economy, the bank is unlikely to increase its net interest margin and fees to compensate for the expected higher credit costs, and if it is unable to continue with its earlier strategy, shareholders should expect a decline in its profitability. Also, on the liabilities side, while the bank is focusing on opening a huge number of new accounts, the saturated state of the market and the economy indicate that incremental growth is likely to be far less profitable for shareholders than in the past. While its strategy may assist the bank in defying the tide, the fact remains that the new CASA liabilities will not be as lucrative as in the past.