Last Updated on December 29, 2021 at 6:08 pm
HDFC Bank has been a favourite investment for a lot of investors in the Indian equities – be it Retail Investors, Fund Managers, FIIs, or DIIs. And, with good reason too. HDFC Bank has outperformed almost every bank in India in terms of stock price performance. An analysis.
About the author: Arjun Budhraja is an MBA in finance with fifteen years of experience in the finance sector. He currently is an entrance exam CAT, GMAT, Law, BBA, etc.) coach. His interests include Personal Finance and Equity Markets. The opinions expressed in the article are solely the author’s and do not reflect the opinions of freefincal.
Here’s a chart showing the comparison with a few banks over the last 10 years. HDFC Bank stock price has given an appreciation of more than 550% since 2011 compared to less than 200% for others, with SBI being an absolute laggard. The only bank which can claim to have matched HDFC Bank’s performance is Kotak Mahindra Bank (KMB, not available on this chart).
Through this article let us try to understand why this has happened, and more importantly, whether this outperformance can continue in the future. For this analysis, let us look at some basic parameters of company & stock performance.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Firstly, let us take the Compounded Annual Growth Rate (CAGR) of Revenue of various banks for the last 10 completed financial years. Immediately one can see the outperformance of HDFC Bank (and KMB) as compared to other large banks.
Stock | Revenue CAGR (2010-2020) |
| HDFC Bank | 22.37% |
| ICICI Bank | 10.90% |
| Kotak Mahindra Bank | 21.95% |
| Axis Bank | 18.53% |
| SBI | 10.43% |
Another important thing is that while for other banks, the growth rate has fluctuated over the years (sometimes even recording negative growth), the growth of HDFC Bank has been more or less consistent around the 15%-25% range. This is significant because all investors like to have surety, and are ready to pay a premium for this safety net of certainty.
Next, let us look at the CAGR of Net Profit (Profit left after all expenses). Here also we see a similar outperformance by HDFC Bank & Kotak Mahindra Bank. Here too, HDFC Bank’s growth has been largely consistent over the years.
Another important thing to notice here is that the CAGR of net profit is higher than the CAGR of Revenue for HDFC Bank – which means that their operational performance has been getting better over the years.
*Axis Bank is negative due to a large one-time loss in FY 2020 but even without that their growth would not have been close to HDFC Bank
Stock | Net Profit CAGR (2010-2020) |
| HDFC Bank | 24.67% |
| ICICI Bank | 7.43% |
| Kotak Mahindra Bank | 21.72% |
| Axis Bank | -2.86% |
| SBI | 5.35% |
The next metric we look at is the CAGR of the stock price. The movement in stock price is likely to follow the trend of revenue and net profit, and we can see this quite clearly here. You might notice that the stock performance of KMB is better than HDFC Bank despite HDFC Bank being better in Revenue CAGR and Net Profit CAGR.
This can mean one of two things: Either KMB was underpriced in 2010 and through this outperformance it has caught up with the valuation of HDFC Bank, or that KMB is now overpriced as compared to HDFC Bank. In my opinion, it is the latter.
Stock | Stock Price CAGR (2010-2020) |
| HDFC Bank | 22% |
| ICICI Bank | 13% |
| Kotak Mahindra Bank | 25% |
| Axis Bank | 11% |
| SBI | 4% |
Now, let’s take a look at Gross NPA. Gross NPA simply includes all the loans where EMIs were not received for 3 continuous months. Even though this data is a bit old, a similar pattern has continued for both HDFC Bank & Kotak Mahindra Bank while for others numbers have either remained the same or become worse.
This reflects good lending practices at HDFC Bank and KMB. Their internal checks and balances, and set procedures and guidelines protect them from lending money to risky borrowers.
Bank | Gross NPA Total (2014-2018) |
| HDFC Bank | 25313 crore |
| ICICI Bank | 147221 crore |
| Kotak Mahindra Bank | 12540 crore |
| Axis Bank | 68873 crore |
| SBI | 552273 crore |
After Gross NPA, the next numbers have to be Net NPA. Net NPA means Gross NPA minus the amount already set aside as provisions for any future defaults. Here also, HDFC Bank and Kotak Mahindra Bank outperform everyone else.
For both Gross NPA and Net NPA, the performance of HDFC Bank is much more impressive that KMB. This is so because HDFC Bank is much larger in size (more than 3x).
On this metric too, other banks have done either much worse than the period mentioned above or have just about managed to maintain their mediocre performance.
Bank | Net NPA Total (2014-2018) |
| HDFC Bank | 7481 crore |
| ICICI Bank | 75556 crore |
| Kotak Mahindra Bank | 5827 crore |
| Axis Bank | 30082 crore |
| SBI | 283625 crore |
Another important number tracked by investors in the banking sector is the Net Interest Margin (NIM). It refers to the interest rate paid by the bank and the interest rate it collects on loans given.
Here also, HDFC Bank & KMB outperform all other banks with both of them having NIM of above 4% while a lot of other banks are in the range of 2%-3.5% and some are even lower than that.
Operating Profit Margin (OPM): Out of all the major banks in India, only HDFC Bank has maintained a positive Operating Profit Margin and a positive Net Profit Margin for every quarter in the last 10 years. That speaks volumes about their operational efficiency.
The credit for this fantastic performance by the bank has been given to the internal policies and processes developed and enforced by the management of HDFC Bank. This in-built intangible strength of the bank should help the bank keep up the outperformance in the future as well.
In the below chart, you can see that the current Price-to-Earnings ratio (PE Ratio) of HDFC Bank is near to the median PE ratio over the last 15 years. An interpretation of this is that compared to the last 15 years, the stock is not overpriced. But one has to consider that since HDFC Bank has been performing really well over many years, their PE Ratio has been on the higher side compared to other Indian banks for most of these 15 years.
What does all this mean for the future and what should you do?
For any long term investor with an equity portfolio, around 30% of the total amount should be dedicated to the financial services sector – this is because around 30% of Nifty’s market capitalisation is in the Financial Services sector – and HDFC Bank is one of the prime candidates to be included into your portfolio.
The only bank whose business performance and stock price performance have come close to HDFC Bank is Kotak Mahindra Bank. At least one of these should be part of any well-diversified equity portfolio.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)