Rural boost for HDFC Bank

Fund raising to drive loans, digitisation to be cost-efficient

The Centre's approval to raise ~240 billion capital from foreign investors is likely to keep HDFC Bank in a sweet spot when most of its public sector peers and large private corporate lenders are facing pressure. Even the Street welcomed the move, with the stock rising by about 3 per cent following this development, versus the BSE Sensex's 1.5 per cent decline. This has taken the gains to 13 per cent so far in 2018.

Investors are eliciting comfort from the fact that the nod came at a time when the rural economy is recovering, banking on a normal monsoon and improved incomes, among other factors. These additional funds, according to the bank's release, will be utilised for growth in the semi-urban and rural areas.

No doubt, the bank reported a sturdy performance in 201718, with net interest income (difference between interest earned and expensed) and net profit, each, growing by 20-21 per cent and the balance sheet by 23.2 per cent. But its thrust for the rural and semi-urban areas would further push up its loan book. Around 30 per cent of its retail advances (57 per cent of total advances) in 2017-18 were from rural pockets (extrapolated from the amounts of agricultural and allied advances mentioned in the annual report for the year).

JP Morgan, in its May 2018 report, had said HDFC Bank had made the strategy to go rural earlier than everyone else, and this would likely stand the retail business in good stead for a long time.

The bank's focus on these areas is apparent from the fact that over 50 per cent of its banking outlets are in rural and semi-urban areas. These would provide cost efficiency, as additional costs to drive growth would remain under control, supporting overall profitability. Additionally, the bank's digitisation efforts would help in cost optimisation. The annual report stated that over 85 per cent of the bank's transactions in 2017-18 were through the digital platform, and technology is facilitating improvement in turnaround time (faster loan processing/disbursement) in the rural category.

Meanwhile, the bank's wholesale book, besides retail advances, would continue to get push, owing to the weak performance of the public sector banks. Analysts expect HDFC Bank to post 25-30 per cent loan book growth.

"We see the capital raise to be a positive trigger, and it would add 240 basis points to 2018-19 estimated Tier-I capital (13.2 per cent as of March 2018)," says a Citi Research report.