Indian Banks Anyone? Four Letters: HDFC

October 23, 3006 – Last week I wrote that I wouldn’t touch China’s banks with a ten foot pole as in investment vehicle no matter how big Chinese bank IPO’s are splashed all over major newspaper’s headlines. However, India’s banks are a different manner. When it comes to financial institutions I do like the leaders. In India, this would mean ICICI bank and HDFC bank, both of which trade on the New York Stock Exchange as well.

india_flag.gifHowever, as I mentioned before I think both ICICI and HDFC are a little too expensive right now. Compared to big American banks such as Bank of America and Wells Fargo Bank that respectively have P/E ratios of 13 and 15.5, certainly ICICI and HDFC’s P/E ratios seem ridiculously expensive. However, when you look at the much more accurate measure of PEG (P/E to growth), both ICICI and HDFC have PEG’s less than or about equal to 1. All of a sudden, ICICI and HDFC do not appear to be so expensive.

Because I still expect a strong pullback sometime in the near future in the U.S. stock markets, and regional markets tend to follow the U.S. market’s behavior in the short term, I think that there will be ample opportunity in the future to buy both these Indian banks at cheaper prices than today. Furthermore, both ICICI and HDFC have had great runs over the past three months, and as we all know, no stock price goes straight up without experiencing short term corrections.

So why India instead of China?

First of all the India banking industry has been well protected by the Indian government from foreign competition. This has given private banks proper time to implement risk management strategies instead of worrying about having to sell every product out there to compete with a deluge of foreign bank competition.

So compared to China’s NPL (non-performing loan) ratio of 8.9% by year end 2005, the NPL portfolio of Indian banks decreased from 14% in 1999 to 5.5% by the end of 2004 to a current rate of 3.84%. Respectively, ICICI and HDFC banks even fared better than the nationwide NPL ratio. However, just as I believe that China’s nationwide NPL system is actually higher than their officially stated 2005 year end figure of 8.9%, perhaps some of the NPL figures in India should be taken with a grain of salt as well.

That said, I am still much more comfortable with investing in India’s banking industry than China’s banking industry. Many India banks seem to be pursuing growth the proper way – Ensuring that risk management systems are in place before chasing after growth, as opposed to China, where the opposite mentality seems to predominate. Furthermore, for the past three years, Indian banks have the highest ROE (return on equity) of all Asian and Pacific Rim banks, even higher than their more developed peers in Singapore, Japan, New Zealand and Australia (Source: Moody’s).

Though I like both Indian banks as investments sometime in the near future, if I had to choose between HDFC and ICICI, even though ICICI is the giant, I would pick HDFC.


It simply comes down to management. Years ago, when I was a Private Wealth Manager for a Fortune 500 corporation, I lobbied for a million dollar unsecured line of credit for a client of mine. Management was against an unsecured line because though the client had a net worth in excess of 50 times the line of credit, most of his worth was tied up in real estate. However, I had built a solid relationship with this client and based upon his character I knew that the million dollar line was one of the lowest risk loans the bank would ever make. So I lobbied and lobbied and lobbied until management finally shared my viewpoint and we got the deal done on an unsecured basis. I still stay in touch with this client so I know that his line has never come close to being in default, and it would have been a damaging blow to this client’s relationship with the bank if I had accepted management’s initial refusal to do the deal.

When looking for companies to invest in, if I am on the fence about a decision, I focus on the quality of management and people, just as I did in deciding what clients were worthy of going to war for. Last year, I sought out companies that would benefit from the construction boom in Asia, and I settled on a Mexican company, Cemex.


I liked the fact that when Cemex top management was looking for companies to acquire in India last year, that they refused to be swept along by the mania that existed at the time. Many companies will grossly overpay to acquire companies in rapidly expanding markets just to get a piece of the pie. Cemex management, on the other hand, at the beginning of 2006, firmly stayed on the sidelines while contemplating how to grow their business in India. They stated that all of the deals presented to them were too expensive and that none” made sense”.

The management of HDFC has the same sensibilities. HDFC Bank’s country head of credit and market risk, Paresh Sukthankar, stated “When the market is growing, you can say ‘I will grab market share and I will figure out along the way how to make money from it’ or you can say ‘I can pick and choose, and still grow.” Companies that pick and choose and still grow, such as Cemex and HDFC, will have much longer and prosperous economic situations in future years. I avoid Chinese banks because I see most of them as taking Mr. Sukthankar’s first approach of “grab[bing] market share and…figur[ing] out along the way how to make money from it”.

Because of HDFC’s strong management, they have among the lowest NPL (non-performing loan) ratios of any bank in Asia, at only 0.24%. This despite tremendous growth. Comparatively, the latest figure for ICICI bank is 1.65%, and nationwide for India is still a very respectable 3.84%.


J.S. Kim is the Managing Director of maalamalama, an online investment education course that utilizes groundbreaking investment strategies to uncover ignored stocks, asset classes, and global markets to identify the best low-risk, high-reward investment opportunities with the best chance of returning high double-digit and triple-digit gains.

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