HDFC Bank- we understand your world

There’s a couple of items that lead to the valuation difference.

1. Underlying operations – Indian banks do very little risky businesses around collateralisation and securitization. Investment Banking and Trading operations are smaller scale and take very little risk.

2. Differential in GDP growth and much bigger differential in credit penetration.

So lower volatility of earnings and larger potential growth – lead to higher sustainable profitable growth.

Underpenetration is also due to lower competition – leads to higher NIMs and ROAs

Also Citi is a terrible example. Mismanaged for 25 years.

Why should HDFC Bank’s cross cycle 15-20% growth and 15-20% ROE be available at 7 p/e?

If you are concerned about 15% growth being too much – at that growth rate HDFC Bank won’t even gain market share. In the last FY – HDFC Bank garnered a quarter of ALL incremental deposits in the system.