Home / Industry / Banking /  The 20% growth principle that built HDFC Bank

The 28-year journey of HDFC Bank, which took another leap forward last week, can be broken into one number that has become a tenet of sorts for it: 20%. That is the annual rate the bank set for itself to grow, drawing from the perceived potential of the Indian economy. The banking sector tends to grow at 2.5 times the economy. Thus, if the economy grew 8%, HDFC Bank said it should grow at least 20%. That’s effectively doubling in size every three-and-a-half years.

Helmed by Aditya Puri for much of this journey, HDFC Bank achieved that mark regularly: its advances have grown more than 20% in 17 of the last 20 years. Its net profit growth has exceeded 20% in 18 of those years. In the process, it laid down a blueprint of growth that was steady and consistent, and was also profitable and backed by prudent risk management.

Those traits have defined HDFC Bank’s rise up the ranks to become India’s second-largest bank by advances. And with its announcement last week that it would be absorbing its housing-finance parent HDFC, the third-most valued listed company in India has closed the gap significantly with the top two.

HDFC Bank has delivered peerless shareholder returns. A sum of 1,000 invested in HDFC Bank in July 2002, when the Bombay Stock Exchange launched an index for Indian banking stocks, is worth 81,520 today: the same is worth 31,000 for State Bank of India (India’s largest bank), and 35,000 for ICICI Bank (its private peer).

Step by Step

In the early 1990s, as part of opening up the economy, India gave 10 bank licences to private entities. Beset by issues, four of them merged into larger banks. A couple of them had their share of upheavals, but remain around. Amid those different hues of performance, HDFC Bank has been a picture of solidity. Although it merged two banks into it, HDFC Bank is principally an organic growth story.

When it launched in 1994, HDFC Bank was one among the 80-odd scheduled commercial banks (excluding regional rural banks). By 2004, it was ranked 13th in terms of gross advances. Powered by its 20% growth canon, it made steady progress. And when several leading public sector banks were hamstrung by bad debts in the middle of the last decade, it surged to number two, behind SBI. Today, its gross advances are about half of SBI’s, but it is valued about 80% higher.

Risk management

One reason for the valuation premium HDFC Bank commands is its cost of funds. In March 2021, about 46% of its deposits were parked in current accounts (on which it pays no interest) and savings accounts (on which it pays a minimal 3-3.5%), which is considered good. This ratio, called CASA, is similar for SBI and ICICI Bank. A separation happens in risk management.

Over the past decade, Indian banks have been weighed down by bad loans, some more than others. They have been on a cleaning spree, which has lowered their profitability and constrained their ability to expand. For example, since 2004, gross non-performing assets (NPAs) of ICICI Bank have ranged between 1.5% and 9.9% of gross advances, and exceeded 3% in 16 of those 18 years. By comparison, only in one year did this figure for HDFC Bank hit 2%. As a result, it is able to convert more of its CASA advantage into profits.

Branch Economics

Urban branches have formed the foundation for all new-age private banks, but HDFC Bank has diversified beyond. Between December 2009 and December 2021, the lender moved from having 1,769 branches to 5,849, with the share of rural branches rising from 4% to 18% and semi-urban ones from 23% to 31%.

The branch count of HDFC Bank is not decidedly higher than its leading private peers, and is a far cry from that of public sector leaders. Where HDFC Bank scores is how it sweats those assets. Among the top three public sector banks and top three private sector banks by gross advances, HDFC Bank has the highest average loans per branch. This is one of the many efficiency metrics that HDFC Bank stands apart on—and it goes back to that first principle of 20% growth, that too profitable. is a database and search engine for public data

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