HDFC Bank: Retail Banking Strategy

A Strategy Presentation by: Chandan Ahuja Kunal Dev Joshi Pragya Gupta Sudhanshu Shekhar

HDFC: An Introduction
An Indian financial services company based in Mumbai, Maharashtra that was incorporated in August 1994. HDFC Bank is the fifth largest bank in India by assets and the largest bank by market capitalization as of 1 November 2012. The bank was promoted by the Housing Development Finance Corporation, a premier housing finance company (set up in 1977) of India. As on August 2013, HDFC Bank has 3,119 branches and 11,088 ATMs, in 1,891 cities in India. The bank has a balance sheet size of Rs. 3837 billion. Reported net profit of INR 5167.07 crore (US$790 million), up 31.6% from the previous fiscal.

Porters 5 force Analysis

PEST Analysis

IFAS for HDFC Bank

Internal Factors STRENGTHS Strong Management Able to pass on the cost to customers Non Core business like HDFCs AMC, Insurance and Real Estate private Equity returns are strong Large share of low-cost deposits, higher net interest margin Better quality of assets, low NPA Attrition rate in HDFC is low Total Weight 0.65 0.05 0.1 Rating Weighted Score Comments Enjoys strong leadership under Deepak Parekh and Aditya Puri Any increase in CRR or LAF is reflected in Bank's base rate immediately Have witnessed big deals and corresponding profit in the Annual results High NIM of 4.3% 0.2 0.15 0.05 4.5 4 4 0.9 0.6 0.2 2.65 NPA of just 1.2%. 4 4 0.2 0.4

0.1

3.5

0.35

It is one of the best places to work in private banking sector

IFAS for HDFC Bank

Internal Factors WEAKNESS Weight 0.35 0.05 Rating Weighted Score Comments Cost is too high to enter the market. Micro finance companies have been inconsitant in terms of performance, bring uncertainity to the capital invested by HDFC in them.

HDFC bank doesnt have strong presence in Rural areas.

1.5

0.075

Over dependence on Micro finance companies, to meet financial inclusion norms

0.1

1.5

0.15

High dependence on retail individual loans. Low operational efficiency. Not very aggressive in M&A space. Total

0.05

0.1 Productivity and process currently used is a concern. Believes in growing only organically

0.1 0.05

1 2

0.1 0.1 0.525

IFAS for HDFC Bank

Internal Factor Strengths Weaknesses Total Weights 0.65 0.35 1.0 Total Score 2.65 .525 3.175

Total weighted score of HDFC Bank is above average.

Its strategies are effective: Company is doing well in both core and non-core business. Company s asset quality has helped in maintaining high profit for its

shareholders.

EFAS for HDFC Bank

External Factors OPPORTUNITIES The companies in large and SME are growing at very fast pace. Opportunities abroad. Greater scope for acquisitions and strategic alliances due to strong financial position. Fast growing insurance business in the country. Untapped rural markets. HDFC Bank plans to set up a non-banking finance company (NBFC) to undertakefundbased activities Total Weight 0.5 0.05 Rating Weighted Score Comments HDFC has good reputation in terms of maintaining corporate salary accounts and internet ba.nking facilities Still large amount of HNI's and NRI's can be tapped. With large number of banks, scenario is set for inorganic growth and HDFC is better placed in the industry. Awareness increasing for the insurance product among the citizens. Huge oppurtunity available in the form of commercial vehicle segment(loans) 4 0.2

0.05 0.15

3 4.5

0.15 0.675

0.1 0.05

3.5 3

0.35 0.15

0.1

3.5

0.35 1.875

It could help in diversifying the portfolio and kill competition.

EFAS for HDFC Bank

External Factors THREATS Depressed macroeconomic factors can lead to rise in NPA over time. New age banks are a threat. Weight 0.5 0.1 Rating Weighted Score Comments Rising Interest rates scenario has affected the loan recovery of both retail and corporate sectors. Like Yes Bank, Kotak etc. leading to increase in high cost deposits. Infusion of more banks and High Volume/Low rates scenario will erode profitability 4 0.4

0.15

3.5

0.525

Stagnant market share.

Loss of market share to commercial banks, NBFC's and HFCs Positioning as an expensive bank due to minimum balance rules Operational expenses due to Varying and In-Convenient ECS dates and credit card defaults. Total

0.05

3.5

0.175

0.05

3.5

0.175

Increasing competition may lead to further reduction in NIM.

Minimum charges of Rs. 10,000 on savings account, compared to "0" of PSU banks

0.1

2.5

0.25

0.05

0.15 1.675

It reduces the efficiency and profit margin of the product.

IFAS for HDFC Bank

Internal Factor Opportunities Threats Total Weights 0.5 0.5 1.0 Total Score 1.875 1.675 3.55

Total weighted score of HDFC is above average.

It needs to bring following changes to remain market leader: Industry needs to consolidate, HDFC should be in ideal position to

take the lead.

HDFC needs to diversify into NBFC and seriously weigh options in

rural banking to stem growth.

SFA
Strategic Factor Analysis Summary (SFAS) Strategic factors Weight Rating (1-5) Weighted Score Short Duration Intermediate Long Comments

Strenghts High customer satisfaction,low 0.08 response 4 time and strongest 0.32 player on mortgages + in long + termCustomer satisfaction key to success High profitability and Net 0.10 Interest margin 5 and low NPA's 0.50 + Financial stability Diversified network and 0.08 revamped distribution 4 strategy 0.32 Reaching out to end customers Accredited products and 0.05 non-core business 3 also performing 0.15 well + Products meeting standards Weaknesses Majority shareholding held 0.09 by U.S companies 4 which are 0.36 under stress due + to economic+ slowdown Ownership U.S. dominated High dependence on individual 0.07 loans and 3 processes and 0.21 systems + need to + be better managed Major retail customers growing organically and 0.07 not very aggressive 4 in M&A space. 0.28 Is a possible+ takeover target. No inorganic growth No next line of leadership. 0.06 3 0.18 + Incompetent management Oppourtunities Untapped rural markets 0.08 and overseas acquisition 3 0.24 HDFC life insurance its non-core 0.05 business 2 growing at a 0.10 fast pace + Automating business processes 0.04 with Staffware, 2 its new 0.08 software Threats + + + Rural markets still untapped Non-core business contributing significantly Automating business and processes

Loss of market share to0.09 other commercial 4 and foreign0.36 banks + Competition from ICICI and foreign banks Increase in funding cost 0.06 (Risk of fraud due 3 to increase0.18 in interest + rates and fall in mortgage prices Interest is inherent rates rising to mortgage business) Lack of adequate infrastructure 0.05 in rural3 areas can reduce 0.15 investment + No infrastructure in rural sector Overseas diversificaion0.03 also is risky 2 0.06 + + Foreign risk 1.00 3.49

TOWS Matrix
Strengths HDFC is the market leader in retail loans in the country. Diversified network and revamped distribution strategy. High profitability and Net interest margin and low NPA's. Bank is proactive in passing on cost and benefit to consumers. High customer satisfaction and low response time. Tows Matrix Company non-core business performing well. Oppourtunities SO-Strategies Insurance (non-core business) The company can use its profits to expand in the foreign growing rapidly. markets and non core businesses Untapped rural markets. The company can look at using its diversified network Expansion in foreign markets. and distribution channels to tap the rural markets Threats ST-Strategies Loss of market share to commercial Use profitability to curb the increase in funding cost and foreign banks. Offer better quality products and services to compete Increase in funding cost. with the other players in the industry Lack of rural infrastructure could constrain investment. High competition prevailing in the Weakness Majority stake held by U.S. financial groups which are under stress due to slowdown. High dependence on individual loans. Processes and systems need to be better managed and customer service staff needs training. Marginal international presence. Management cover insufficient and no next line of WO-Strategies Expansion in foreign countries will increase international presence Business processes and systems can be better managed by tying up with IT companies and using new and latest WT-Strategies Develop strength in Individual Loans. Increase focus on Agriculural and Rural Lending.

Strategy Formulation
Business Strategy

Focusing on quality and not on quantity and delivering high quality customer service

Leverage technology platform and open scalable systems to deliver more products to more customers and to control operating costs

Develop innovative products and services that attract the targeted customers

Develop products and services that reduce banks cost of funds

Focus on high earnings growth with low volatility

Options
Customer Retention Strategy

Good customer servicing after sales

Services to be available at discounted prices Waiving of extra charges

Provision Cover Strategy

Increase in provisioning for Loans .

Leveraging Technology
Increase in ATM Strength Mobile banking, internet banking & phone banking. Development of Improved and secured payment mechanism.

Marketing and Branding Strategy

Choices
Differentiating Factor for HDFC is focus on low cost retail deposits. Corporate deposits are costly and volatile as corporate deposits are of short term nature and flowed out easily with changes in interest rate. Bank is focusing on high growth with low risk while others achieve with risk of expansion in non performing loans. Achieved 40% year to year growth in assets and gross NPA declined. More Conservative than required as per regulations. Made specific provisions that cover 70% of its NPL. More aggressive on retail assets. Different retail products include loans against shares, car loans , personal loans etc. In order to increase ROE focuses on stable stream of income by value added services such as cash management , custody services and distribution of financial services while other banks rely on treasury operations.

Corporate Strategy

Growth

HDFC Bank has posted profit growth of over 30% every year for the last decade, richly rewarding its investors. Since 2008, HDFC Banks shares have risen nearly 87%, while rival ICICI Bank is down about 16%. Trading at five times its book value, HDFC Bank is the worlds most expensive lender and is among 15 banks globally to trade at a premium to its intrinsic value a measure of how much shares should be worth when considering expected growth rates over the next decade. So what is the secret sauce?

The Secret Sauce

Selective lending. Diversified exposure. Focus on low-cost savings deposits. Shunned risky, exotic products. Picky about its Customers. An average CASA ratio of 56% over last seven years, a Net Interest Margin (NIM) of 4.2%.

The banks infrastructure funding is largely limited to working capital loans to contractors of project developers, keeping exposures smaller, shorter and relatively safer. Non-performing loans to remain within its five-year average of 1.31.5%

The Growth Challenge

If balance-sheet growth remains slow, then maintaining 30% profit growth will not be easy.

HDFC Bank hopes to increase its market share and is charging into Indias hinterland, where millions still have no bank accounts.
Stayed away from project finance. "We plan our growth across three horizons: one that I can see in front of me; second, what I can see in front of me but will become a big business five years from now; third, at the bottom of the pyramid, which will become a big business, maybe five years from now, Aditya Puri

Portfolio
HDFC has steadily improved its asset quality by concentrating on top clients. The bank is nimble-footed enough to change its loan mix in different scenarios. Analysts say the bank is growing ahead of the sector across most retail segments. 33 per cent growth in retail loans year-on-year (YoY) and 4.4 per cent quarter-on-quarter was predominantly led by automobile loans (up 19 per cent YoY), commercial vehicles (60 per cent YoY), business banking (27 per cent YoY), home loans (up 23 per cent YoY) and personal loans (34 per cent YoY). These segments cumulatively account for 80 per cent of the retail loans.

A Good Parent
Centurion POB Merger/ Asset Quality

Lack of International Presence

Rural and Agri Focus

The long Term Strategy

Growth Driver for 2014. A retail-led strategy means more consumer touch points. Today, nearly 35% of the branches will be making a loss because it takes 20-24 months before a branch breaks even. Retail, Agriculture or Commodities: share and develop cross-selling relationships.

Recommendation
Increase Overseas Focus: Although HDFC Bank has grown domestically at a faster rate, ICICI Banks global reach still makes it a bigger entity. Mobile Penetration: Launching Mobile services in Hindi is a great initiative, however this needs to be extended to other major regional languages as well. HDFC needs bring more technical innovation to compete with ICICI, SBI and others.

Bibliography
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December ; pp 35-38
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