Mumbai: HDFC Bank at the weekend suspended 20 staff following a probe by regulators into claims of money laundering from Indian website Cobrapost.
But the event was especially unusual given the reputation of HDFC Bank, India’s second-largest privately run bank, as a low-profile institution, best known for its unbroken run of healthy profits and robust stock valuation, which put it among the most expensive banks in the world.
A ranking of its large global peers last year by price-to-book ratio, a common measure of valuation in the sector, put HDFC Bank at the top of the pile with a ratio of nearly 5 times, a level unheard of in the industrialised world, and suggesting strong market confidence in its future performance.
“Some international investors come here sceptical of HDFC’s big valuation, but the more time they spend looking at it, the more they all just conclude that it simply is the best run bank in the country,” says Nick Paulson-Ellis, the Mumbai-based head of Espirito Santo’s India office.
This success is partly relative. India’s banking sector is dominated by state-backed institutions, many of which are poorly managed, leaving investors in financial services with limited options.
However, since setting up in 1994, HDFC has attracted admiration for its sure-footed management, careful customer selection and heavy investment in technology.
“On every front it scores highly from its inbuilt risk management culture and the way it picks credit to its strong brand and extensive retail distribution network in smaller cities and towns,” says Paulson-Ellis.
Just as importantly HDFC has avoided many of the bad debt problems that have dogged India’s banking sector over the past year as the country’s economy slowed.
HDFC Bank’s gross non-performing assets stood at roughly 1 per cent in the last quarter, about a fifth the level of state-backed State Bank of India, the country’s largest bank by assets.
In an interview with the Financial Times, Aditya Puri, HDFC Bank’s chief executive, explained his success by pointing to stringent internal risk management and an aversion to lending to companies in debt-laden industries such as infrastructure and power.
“What we have said is that we will take fair to moderate risk, which is appropriately priced,” Puri said. “But in the end you either lend to highly leveraged corporations or you don’t. And we don’t”.
The heady valuations that have followed this approach are unlikely to last forever, say some analysts. Most agree the worst is not yet over for India’s banking sector, with more bad loans to come as growth in the wider economy remains sluggish denting bank stocks, including HDFC’s, which is down more than 5 per cent so far this year.
Its lofty price-to-book ratio is also likely to fall to 3.6 during the next financial year, according to Espirito Santo, although that would still be roughly twice the level of its two main private sector competitors, ICICI and Axis.
Over the longer-term competition may prove challenging too, with regulators set to issue fresh bank licenses later this year for the first time in about a decade, potentially allowing some of India’s most recognisable companies to establish new banking rivals.
But in the short term, few analysts see much chance of a current competitor overhauling the lead established by India’s most successful bank. And until then, the odds seem equally slim that foreign investors will turn away from one of their most favoured Indian stocks.