Behind the Stock: Is HDFC Bank shedding retail skin to cash in on coming capex boom?

HDFC Bank’s former managing director and chief executive officer Aditya Puri is credited for taking the private lender to the pinnacle of India’s banking sector and laying the blueprint for years of dominance even when he does not sit in the corner office.

But his true legacy might surface a little later. For, in his last few years at the CEO’s office, he is said to have drawn an even bigger plan to steer the bank towards the 'roaring 2020s’ much before the term was even coined.

Puri made HDFC Bank a dominant force in the retail banking landscape with the might to take on even the state-owned behemoth State Bank of India, but in his last two-and-a-half years he changed tack and slowly nudged the lender towards shedding its retail tag and pivot towards corporate lending to capture the impending capacity expansion boom in the country.

The share of retail banking loans in HDFC Bank’s total loans has come down steadily to 47 per cent in the year ended March 31, 2021, from 48.73 per cent a year ago. That share used to be as high as 56.49 per cent three years back.

Consequently, the share of wholesale banking, which largely constitutes corporate loans, has been rising steadily over the past three years. As of March 31, it stood at nearly 53 per cent of gross advances against 45 per cent three years ago.


The decline in the bank’s retail loan share is not coincidental. In the aftermath of the IL&FS crisis in September 2018, Indian households went on a deleveraging spree, a trend that has only been accelerated by the Covid-19 pandemic.

The health crisis may now slow down the growth in the bank’s unsecured loan book, a major factor behind the previous decade’s trailblazing retail growth, as the bank tightens the screws to keep asset quality steady.

At the same time, a window of opportunity is opening in the corporate loan segment for India’s banks after years of pain. The government’s focus on capital expenditure over the next four years and expectation of a post-pandemic boom in the economy mean the heydays of corporate banking may arrive soon.

The signs are there already. HDFC Bank’s corporate loan book grew at a scorching pace of 22 per cent during the March quarter, with the bank highlighting early signs of capex revival in sectors like pharma, auto ancillary, metals and food industries.

“As a strategy, the bank would continue to capture market share in corporate loans and has built a strong SME portfolio (20% of the total portfolio). It expects this to be a strong earnings driver, going forward,” Emkay Global Markets noted in its post-earnings note.

The strategic move by HDFC Bank also comes at a point when two private sector heavyweights in India’s corporate banking — ICICI Bank and Axis Bank — are both looking to move away from the segment after being hemmed in multiple times by large non-performing loans during the 2012-2019 period.

For HDFC Bank, strong growth in corporate banking may not come immediately, as Indian companies are looking to use the pandemic to deleverage balance sheets and lenders seeing a rise in prepayment of loans over the past year.

Brokerage firm Emkay Global says the rising share of corporate loan book will initially dent net interest margins at the bank in the near term, but it will result in higher fees and bring down cost ratios in the medium term.

Whether HDFC Bank’s strategic move towards capturing market share in corporate lending will pay the same dividend as retail banking is yet to be seen, but the bank has shown that despite its size, it still remains nimble enough to move swiftly with the tectonic shifts in the sector.