HDFC Bank is the largest private sector bank in India with an 8.5% market share of deposits and a 9.6% market share of loans.1 Large banks tend to be good businesses because, through deposits, they are able to borrow money at a low rate relative to their competitors, primarily non-bank corporations and smaller banks. This funding cost advantage occurs because 1) the government guarantees bank deposits (in the case of India, up to 500,000 rupees—approximately $6,700 at current exchange rates—per account);2 2) the industry is highly regulated, creating barriers to entry; 3) among banks, many customers value the liquidity, security, and convenience that the large banks provide over the higher interest rate they could earn if they deposited their money elsewhere; and 4) switching costs prevent most customers from constantly shopping and bouncing around for the highest deposit rates among the large banks. While this funding advantage is the most critical, it’s not the only advantage the large banks possess. The large banks also possess superior geographic and product diversification that reduces the risk of their loan portfolio relative to more specialized lenders as well as economies-of-scale cost advantages in areas such as technology, cybersecurity, regulation, and marketing. And, in India, the large private sector banks have an even greater advantage. Unlike in the United States, where all banks are private, only 40% of the banks in India are private and only 36% are private and domestic (with the remaining 4% being foreign banks). Because the public sector banks are older and owned by the government (at least 50% of shares outstanding)3 and, as a result, have less customer-focused and return-on-capital-driven cultures, they tend to be share-donors to the private sector banks over time. In fact, since 2015, public sector banks have ceded roughly 15 percentage points of market share to private sector banks.4
HDFC Bank, in particular, also benefits from a belief network effect. Like J.P. Morgan in the United States, HDFC Bank, as the leading private sector bank in India, is the preferred partner for many businesses, executives, and individuals because the brand is associated with excellence, wealth, safety, technological prowess, and customer service. However, unlike J.P. Morgan, HDFC Bank is not only the most valuable banking brand in its country—it is also the most valuable brand of any kind in its country.5
As a result of its many advantages, we believe HDFC Bank will continue taking market share and earning industry-leading returns for a long time to come.6 Also, a bet on a bank is, in many ways, a levered bet on a country. And, in our view, there are few countries with a brighter future than India. With its democratic political system, strong rule-of-law, soon-to-be-largest-in-the-world population (1.4 billion and growing), 7 low GDP per capita ($1,900 versus the U.S. at $63,544),8 and uniquely favorable demographics (where, in contrast to China, Europe, Japan, and the U.S., the working age population is and will likely remain larger than the non-working population for the next 35 years),9 we think India is likely to grow its GDP for many decades at much faster rates than the world as a whole, and we think HDFC Bank is the business best positioned to profitably ride this powerful growth wave.
Back to Global Champions Summary Page
1 See https://blog.investyadnya.in/indias-top-5-banks-by-market-share/.
2 See https://indianexpress.com/article/explained/explained-what-is-deposit-insurance-law-changes-benefit-account-holders-7428921/.
3 See https://en.wikipedia.org/wiki/Public_sector_banks_in_India.
4 See https://theprint.in/economy/in-just-5-years-private-banks-have-narrowed-public-sectors-huge-lead-in-loans-deposits/550570/.
5 See https://www.businesstoday.in/industry/banks/story/most-valuation-brands-hdfc-bank-retains-top-position-reliance-retail-273465-2020-09-19 and https://thebrandhopper.com/2020/11/09/brand-hdfc-bank-indias-most-valuable-brand/.
6 See https://www.quora.com/Why-is-HDFC-Bank-better-compared-to-other-banks and https://www.hdfcbank.com/personal/about-us/news-room/press-release/2021/q3/hdfc-bank-named-best-bank-in-india-by-financeasia?__cf_chl_jschl_tk__=3gGjqXR2KVEh.L3VYWDS5X6RQQPwZm5oPKNARcyLAo0-1638820377-0-gaNycGzNCL0.
7 See https://www.business-standard.com/article/current-affairs/india-may-overtake-china-as-most-populous-country-even-before-2027-report-121051201219_1.html.
8 See https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=IN.
9 See https://economictimes.indiatimes.com/news/economy/indicators/india-enters-37-year-period-of-demographic-dividend/articleshow/70324782.cms?from=mdr.