HDFC Bank a silver lining in gloom

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.

Though 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 — 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 the IL&FS loan default triggered an industrywide credit squeeze.

HDFC Bank’s market value has surged over $21 bn in the past year