Low risk, high reward: The secret at the world's most expensive bank

Sun Nov 18, 2012 4:03pm EST
 
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By Swati Pandey

(Reuters) - When reports surfaced in July that Indian newspaper publisher Deccan Chronicle Holdings Ltd DCHL.NS was struggling for survival, several of its creditors were caught off-guard. Not HDFC Bank Ltd (HDBK.NS: Quote).

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 Bank 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 Ltd (ICBK.NS: Quote), Axis Bank Ltd (AXBK.NS: Quote) and a dozen others, have been left with bad loans totaling $750 million.

"Alertness and the ability to pick early signs of problems have helped," Paresh Sukthankar, executive director at HDFC Bank, told Reuters in an interview, pointing to the bank's low bad loans of 0.9 percent of its book compared with 4.2 percent 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 percent 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 India (SBI.NS: Quote), which controls a quarter of the country's loans and deposits market.

Since 2008, HDFC Bank's shares have risen nearly 87 percent, while rival ICICI is down about 16 percent.

Thomson Reuters StarMine's models also paint a flattering picture of its shares, a third of which are held by foreign funds. 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.   Continued...