George Fraise, Founding Principal at Sustainable Growth Advisers, says HDFC Bank Limited (ADR) (NYSE:HDB) is bringing modern retail-banking practices to India and should see growth driven by the rise of India’s middle class.
HDFC is based in Mumbai, India, and was incorporated in 1994. It’s now the fifth-largest bank in India by assets. We typically do not invest in banks because traditionally those institutions are difficult to model because of the lack of transparency in their loan portfolio and the complexity of their operations. HDFC is different.
The banking sector in India has long been dominated by national banks, which offer Indian consumers very basic services. HDFC is bringing conveniently located, modern retail-banking practices to a growing middle class that is hungry for them.
Fraise says HDFC is growing by opening up more branches around the country, taking on deposits and making basic auto and mortgage loans.
So it’s a simpler business model. Over three quarters of the revenues come from the interest on those multiyear loans, and another 15% from fees and services, so 90% of the revenues are recurring.
The growth prospects are also quite strong. The company has 28 million customers in a country with over 1 billion people, so there are a lot more branches that they can open. We can see this business continuing to grow organically at 20% per year over the next three-plus years driven by continued rapid growth of the Indian middle class and expansion of the retail-banking footprint.
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