All around HDFC Bank, India’s biggest lender by market value, the news seems to be bad and getting worse: Economic growth is slowing, loan losses are rising and shadow banks are mired in crisis.
And yet investors keep piling into HDFC Bank’s stock, convinced it will emerge a winner from India’s financial woes. The company’s market value has surged by $21 billion over the past year, more than any other bank worldwide. Among the 25 biggest lenders globally, no other stock commands a higher price relative to earnings or net assets.
Bulls say they have good reasons to be optimistic: HDFC Bank will grab market share from embattled shadow lenders and benefit from a flight to quality by investors who’ve grown wary of smaller competitors. While skeptics argue that the bank is vulnerable to India’s economic challenges — pointing to its large consumer loan exposure and the looming retirement of its longtime leader — even they say betting against HDFC Bank is risky. Among 54 analysts who cover the stock, only one has the equivalent of a sell rating. “The business continues to perform very well,” said Nick Payne, the London-based head of global emerging markets at Merian Global Investors (UK), which oversees about $33 billion and has been adding to its holdings of HDFC Bank shares. “Strong banks and franchises tend to get stronger when times get tough, as the weak fall by the wayside.” India’s shadow banks, until recently a growing competitive threat to HDFC Bank and its peers, have been reeling since the latter half of 2018, when a group company of Infrastructure Leasing & Financial Services defaulted on its debt and triggered an industrywide credit squeeze.
Mortgage lender Dewan Housing Finance Corp Ltd. has missed debt payments since June, while firms including Reliance Capital Ltd. and Piramal Capital & Housing Finance Ltd. have had their credit ratings cut on liquidity concerns.