In this edition of Annual Report Insights, we analyse HDFC Bank’s Financial Year 2020 Annual Report.
We conclude that the bank in its Annual Report emphasised on:
1) Its widespread network of 5,416 branches spread across 2,803 towns/cities which is the largest among private banks. It further highlighted its strong position to tap the growth opportunity in rural and semi-urban markets supported by its strong presence in these areas.
2) Its leadership position in the Indian payments ecosystem with a market share of 50% of total electronic card volumes aided by its 17.9 lakh merchant acceptance points across India.
3) New technological initiatives which contribute to improving customer experience and enhancing operational efficiencies.
A widespread network which is the largest among private banks
HDFC Banks' customer base of 5.6 crore customers has grown by a strong 10%+ CAGR over the last 4 years aided by a wide network (largest among private banks) of 5,416 branches and 14,901 ATMs spread across 2,803 towns and cities. With 52% of its distribution in semi-urban and rural parts of the country, HDFC bank is in a strong position to cater to the increasing demand for financial products and services in these markets. The strong network of 5,379 Common Services Centres (CSCs) further aids its ability to identify and tap into the immense potential of these markets.
Leadership in the payments business
HDFC Bank is the leading player in the payments ecosystem in the country and continues to focus on this space. Every third rupee spent on cards in India happens on an HDFC Bank's issued instrument viz credit, debit, and prepaid cards. On the issuing side, the bank has 3.21 crore debit cards and 1.45 crore credit cards.
Approximately 50% of electronic card volumes which consumers swipe at both online and offline merchants in India go through the HDFC Bank network. HDFC Bank’s new digital payments solution ‘SmartHub Merchant’ app, specially designed for self-employed and small businesses, enables customers to instantly open an account and become a merchant.
Redefining financial services with technology
Digitisation is the strategic focus area for HDFC Bank and an important marker of its performance. Since its inception, the bank has led the digital transformation of the Indian financial services sector and continues to invest in technologies to improve customer experience and enhance efficiencies.
Customers are provided a choice of platforms to access financial services at their convenience. Partnership with platform players and fintech plays an important role in delivering products digitally.
Digital 2.0 is the next phase of the journey for HDFC Bank and during the Financial Year 2020 launched its new website and mobile banking app. HDFC Bank’s virtual assistant EVA (capable of servicing customers as well as processing banking transactions) handles 2.3 million customer queries per month. With a view to step-up customer engagement, the bank has set up a Virtual Relationship Management (VRM) channel wherein relationship managers engage and service the customers remotely and provide targeted product offerings digitally.
Management transition remains an overhang
The bank board has finalised 3 candidates (2 internal/1 external) for MD & CEO position due to being vacated by October 2020. Any clarity from the RBI should emerge around July/August 2020 and will be keenly watched out for.
Asset quality risk manageable
HDFC Bank has been increasing its provisioning over the past few quarters in Financial Year 2020 as a pre-emptive measure against macro slowdown. We believe the higher provisioning buffer would certainly help cushion the NPA impact due to the COVID 19 situation and expect asset quality in the unsecured segment and corporate portfolio to be manageable.
Lower than expected near term asset growth
structural changes within the bank like change in management
A higher-than-expected decline in CASA ratio and change in the macro-environment may impact the cost of funds and consequently margins
Teji or Mandi?
While the near term performance may be impacted in the near term due to impact of COVID-19, HDFC Bank’s strong risk-adjusted NIMs, healthy non-interest income, one of the best cost-efficiency ratios in the industry, strong provisions levels and high level of capital should keep the return metrics in a healthy position.
Therefore our take is Teji given its unwavering focus on risk-adjusted returns, ability to consistently gain market share, and best-in-class profitability metrics.
Teji Mandi is a proactive investment manager for everyone. To read more of our research, please visit https://tejimandi.com/research