The story behind HDFC bank's success | What makes it so profitable and unique ?

Also know Why institutions hold HDFC bank stock. Let’s understand what makes company different from others. What is the characteristics of a good companies and most importantly What makes HDFC different from all the others.

Following are the key secrete behind the success of HDFC bank ( indeed HDFC group)

  1. Financial services business is a hugely profitable and growing opportunity not only in India but also worldwide. Financial services sector is proxy to the nations growth.
  2. HDFC bank has carefully ensured that most of its businesses are consumer-facing, corporate business is always a low margin that too more risky and cyclical in nature.
  3. Strong leader- Biggest strength specially in initial time was HDFC group and leader like Deepak Parekh.
  4. Risk management- Underwriting is the key in banking industry. and trust me nobody understand is better thank HDFC bank
  5. Right capital allocation- HDFC bank do prudent business in their book and for catering bit risky business HDFC allocated small capital and create HDB financials. Presently HDB is market leader in SME financing (NBFC)

Let’s take a joint tour of HDFC journey- From Hsmukh Bhai Parekh to deepak Parekh and now Aditya Puri-

To any company to be “The Great” following things are important-

  1. Promoter- Promoter integrity and his vision is what turns a small company in a great institute.
  2. Integrity comes from values and, It is about keeping interest of all the stake holders first.
  3. Vision is to imaging the world differently with products and services of our company. It is not just imagining but to execute it. Work of good leader is not to lead the company but to make new leaders.

HDFC Limited that later started HDFC bank (not bank) was founded by Hasmukhbhai Parekh to your surprise he was the man behind the ICICI later he founded HDFC limited.

  • Until HDFC founded banking was all about big business man’s game, He was the one who founded HDFC with an vision to serve small individual or retail clients. His vision was to see every indian with his/her own house.
  • Being a good leader he started making new leader and his nephew Mr. Deepak parikh took over as a chairman of HDFC limited in 1993

Deepak Parekh era- Identifying the need of retail customer. HDFC limited led by Mr. Deepak Parekh gets the principal approval from RBI to to start HDFC bank in August 1994.

Great Leaders Create More Leaders. Good leaders have vision and inspire others to help them turn vision into reality. Great leaders create more leaders, not followers. Great leaders have vision, share vision, and inspire others to create their own. - Roy T. Bennett

Banking is a service industry and being a good leader his first job was to create a new leader. Immediate work was to build a good team that can lead HDFC bank and make it a great institute. Look at founding management of HDFC bank-

First team of HDFC bank-

Mr. Parekh and team HDFC has built an dynamic and experienced team to led HDFC bank. Look at the first team, their qualification and experience- Aditya puri was just 44 years old but was carrying 22 years of global banking experience-

The Aditya Puri Era- Before i come to HDFC banks look at the first branch of HDFC Bank at Sandoz House. You can see the vision by high class infrastructure and computer system in 1994 (Evan better than any PSU even today)

What makes HDFC different from Others -

Let's first understand how typical banking company works-

Banking is the capital Hungary business where -

  • Promoter invest some money- Initial capital infused by promoter to start company and later increased by annual profits of the company.
  • Takes deposits from customers and borrow some money from market- To offer low cost loan further to customer it is required to borrow at even at cheaper rate from market and take low cost customer deposits ( CASA)
  • Lend the same money- Key is to manage the risk by prudent lending.

and around all these aspects it create a complete Eco-system of payments and financing. Banks makes decent money from core operation and good money from monetising eco-system by offering doing cross sale services like insurance, investment, forex and other services to client.

Nobody done this better than HDFC bank in India. How-

  • customer centric approach- HDFC has identified even a small problem and started developing product around it. Look at the small example from first annual report of 1994, They have started offering IPO application against fixed deposit. Just imagine. They have also started offering high rate on fixed deposit initially along with good services to cater individual HNI clients.
  • Source- Annual report 1994

  • Convenience- Mr. Puri knows it very well that convenience to customer is the key and it is the only way to offer good services and make loyal customer base. Look at the Management comment on first annual report. Clearly shows they are way ahead of time.
  • HDFC has launched real time Netbanking and International debit card in 1999-
  • By convenience and customer service HDFC created a large pull of individual clients and keeps their cost of capital low by taking cheap deposits from customers by offering good services.
  • Lend money with proper risk management. There is the direct co-relation of high interest cost and high chances of default. HDFC understand it well. They keeps there cost of capital very low and lend at low rate to cater elite client base.

HDFC knows it well that B2C is the only sustainable way to create long term value for the company and it’s stake holders. Technology lead service, convenience to customer and unparalleled services makes such a big Eco-system which are hard to break for any other bank. Very soon HDFC bank has become market leader in retail loans.

Digital banking market leadership-

10 second personal loan-

You can see how HDFC bank has created market leadership in retail segment. Leadership is one thing but long term value creation for shareholders and all the stakeholders comes from profit we generate-

Now let’s understand what numbers says -

HDFC Bank is the only company that has return on equity of 15% for every single year from 1998 to 2019.

Number as on 31 March 2019-

Financial performance-

While revenue and profit constantly growing from 1994 to 2019 asset quality during the same period is maintained also net interest margin has improved.

Net Interest margin comparison- Kotak is the only bank where NIM is more than HDFC bank.

Here comes the real number- Net NPA - Look HDFC has best asset quality in the industry with high net interest margin and sustainable profit and revenue growth

When on almost all the parameter HDFC bank is market leader you got the reason why share is performing- Here is the share performance-

Look at the efficiency of the HDFC bank- SBI is ndia's largest bank by deposit, loan book and every other parameter.

  • SBI has a loan book of about 23 Lacs crore while HDFC bank has a loan book of about 8.2 Lacs Crore but
  • HDFC bank has profit of about Rs. 23000 Crore against Rs. 2300 of SBI in FY 19
  • Employee cost as a % of sales is just 10% in HDFC bank, while same is 19% in SBI.

Biggest beneficiary of value migration -

Because of continuous service issues with PSU banks, Big HNI's and elite companies ended up relationship with PSU banks and started their business with highly efficient private bank. HDFC bank known for prompt service fast in digital adoption become the biggest beneficiary. Here is the data -

  • In 2018-2019, private banks raised deposits worth ₹7.1 trillion, while public sector banks raised ₹2.7 trillion.
  • In 2010-11, public sector banks had raised deposits worth ₹6.4 trillion, while private banks had raised deposits worth ₹1.7 trillion.
  • In 2018-19, private banks gave a total of ₹7.3 trillion in loans, while public sector banks gave ₹2.3 trillion in loans. Comparing this to 2010-11, public sector banks had given loans of ₹5.4 trillion and private banks ₹1.4 trillion.

Price performance-

So finally Rs. 10000 invested in HDFC bank in 2000 is about Rs. 7.2 Lacs now. now do your math.

This is the reason this is the hot favorite stock of all the institutions like Mutual fund houses, FII, DII and HNIs. Retail investor just talk about it, read it and ignore it.

How much mutual funds and FII's holds in HDFC bank -

As on Jan 2020 about 539 mutual fund schemes are holding about 65 crores of HDFC bank-

Shareholders break-up- Everybody else is holding except for a very few retail investors (unfortunately) -


  • Started with the capital of 150 crore in 1994 now HDFC bank has a Market capitalization of about 672000 Crore.
  • It is the only company where 20 year PAT CAGR is more than 30%. Last 20 year ROE for every year is more than 15%.

Man behind the such a great institution-

  • Mr. Aditya Puri is the longest serving MD of any banking company in India or probably across the globe.
  • Joined HDFC in 1994 from Citi bank Malaysia at a salary of about 8.5 Lacs a year is now withdrawing salary of about 13 crore a year
  • He is holding share worth Rs. 1000 crore of HDFC bank.
  • Mr. Aditya puri is retiring next year, Biggest challenge for HDFC bank is to identify his successor but as i told earlier great leaders makes new leader, i am sure Mr. puri will handover batten to very capable person to run such a great institute.

Thank you,

Mayank Gehi