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Low risk and high reward: Mantra of success for HDFC

Publish Date: 19 Nov 2012, 12:55 PM
Last Updated: 19 Nov 2012, 01:00 PM
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Secret of HDFC: Low risk and high reward
Secret of HDFC: Low risk and high reward

When reports surfaced in July that Deccan Chronicle Holdings LtdBSE -4.90 percent was struggling for survival, several of its creditors were caught off-guard. Not HDFC Bank LtdBSE 0.20 percent.

Even as Deccan, which also owned a glitzy cricket team, sought to reassure markets that it held enough assets to stave off a crisis, HDFC BankBSE 0.20 percent was busy getting rid of the loans extended to the group, three sources with direct knowledge of the matter said.

That agility paid off: Deccan has since lost its cricket franchise and its lenders, including heavyweight ICICI Bank LtdBSE -0.61 percent , Axis Bank LtdBSE -1.20 percent and a dozen others, have been left with bad loans totalling $750 million.

"Alertness and the ability to pick early signs of problems have helped," Paresh Sukthankar, executive director at HDFCBSE -1.05 percent Bank, told Reuters in an interview, pointing to the bank's low bad loans of 0.9 per cent of its book compared with 4.2 per cent expected for the industry by March.

At a time when lenders across the world are battling slowing growth and rising loan defaults, HDFC Bank's conservative business model and its knack of delivering returns are proving unique, and offer a lesson for its hard-pressed competitors.

HDFC Bank has posted profit growth of over 30 per cent every year for the last decade, richly rewarding its investors. India's No.2 private sector bank earlier this year climbed to be the country's biggest by market value, ahead even of State Bank of IndiaBSE -0.40 percent, which controls a quarter of the country's loans and deposits market.

Since 2008, HDFC Bank's shares have risen nearly 87 per cent, while rival ICICIBSE -0.61 percent is down about 16 per cent.

Trading at five times its book value, HDFC Bank is the world's most expensive lender and is among 15 banks globally to trade at a premium to its intrinsic value - a measure of how much shares should be worth when considering expected growth rates over the next decade.

So what is the secret sauce of a bank that has sky-rocketed from being a penny stock when it was launched in 1994 to a bellwether and which now features in Forbes Asia's 'fab 50' list of companies for its ability to weather the slowdown?

HDFC Bank has built its consistent growth through selective lending, diversified exposure and focus on low-cost savings deposits, Sukthankar said. It has also shunned risky, exotic products and is picky about its borrowers.

"We live in a volatile world," said Sukthankar, who has worked at the bank since its inception after moving from Citigroup Inc. "We don't chase higher yields and run into higher risks."

HDFC Bank is choosy about issuing credit cards, offering them mostly to existing customers to avoid delinquency, and it has steered clear of lending for two-wheeler purchases in some regions - risk-averse strategies that ICICI now emulates.

The lender expects non-performing loans to remain within its five-year average of 1.3-1.5 percent.

(Agencies)

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