India’s largest lender has performed spectacularly against competitors, both state and private banks, and become a global investor darling. Its rapid growth model is now made precarious by India’s sour financial environment and economic slump.
HDFC Bank is one of the most popular emerging-market equities in the world. Its popularity has been justifiable: the bank hasn’t posted anything less than a strong double-digit return on equity in any year over the past 20. Its proportion of nonperforming assets is markedly lower than the competition and fewer than 10% of its loans are covered by the country’s moratorium on loan and interest repayments.
It is valued as if it isn’t going to stop. The company’s price-to-book ratio stands at 3.32 times, the second-highest world-wide among banks with a market capitalization of more than $50 billion. If HDFC Bank’s share price fell 30%, the company would remain the most expensive bank of its size or larger anywhere in the world on a price-to-book basis.
But as the bank has swelled in size, its ability to continue outperforming in an increasingly dismal banking market gets tougher. Its market capitalization is nearly twice that of all India’s 12 public sector banks put together. It is the country’s largest lender by market capitalization by some distance.
Even before the coronavirus pandemic began, the Indian banking system was in a miserable state. After rapid economic growth in the early 2000s, a considerable slowdown in the 2010s left a mounting pile of bad loans, illustrated brilliantly by economist Vivek Kaul in his recent book, “Bad Money.”
