Business Model of HDFC

HDFC and HDFC bank have recently been in the headlines for a variety of reasons. HDFC, on the other hand, is far more than the two entities we've been hearing about. It is a collection of several enterprises that are part of the HDFC group and have built a name for themselves in the Indian market. What started as a mortgage company has now a combined valuation of more than 14 lakh crore Rupees. What made HDFC stand out from the crowd?
Today, we'll learn more about this company and the various facets of its operations, as well as examine it from a business standpoint.

HDFC: An overview

HDFC is among the biggest conglomerates listed on the Indian Stock Exchange. It comprises one of the finest companies in every sector it is present in and is among the largest private sector banks. Its other subsidiaries are also well known for their function and have a sufficient amount of market share in their respective sectors. Founded in 1977, under the great leadership of Hasmukhbhai Parekh and Aditya Puri, the brand has flourished. To read about the History of HDFC read- From a truck yard to Bank NO.1.
Continuing this legacy, HDFC brand has grown to 9 companies, each performing a distinct function and leading the market segment.  The list of companies under the HDFC BRAND are-

HDFC BANK
The largest Bank in terms of market capitalization, even greater than SBI. Registering a growth of more than 26% compounded every year since its inception for its investors.

HDFC LIFE
HDFC Life is one of India's leading life insurance companies offering a range of individual and group insurance solutions that meet various needs.  HDFC Life is the market leader in the Insurance segment.

HDFC PENSION
It is the largest Pension Fund Manager (PFM) in the retail and corporate National Pension Scheme (NPS) segment.

HDFC MUTUAL FUND
HDFC is a leading Asset Management Company founded in 1999. Running 22 schemes, managing a total AUM of more than 45000 crore rupees.

HDFC ERGO
It is the general insurance arm of the HDFC group. Providing health insurance, car Insurance and other types of insurance. It is well known for its transparent and easy claim settlement process.

HDFC SALES
It began as the distribution arm for HDFC's mortgage business and has now expanded to include all of the HDFC group's financial products, including mutual funds, insurance, and other services.

HDFC CREDILA
Founded in 2006, it is India’s first dedicated education loan company and a pioneer in the field of education loans with tie ups with various colleges; it is a leading education loan provider in the country.

HDFC PROPERTY FUND
It is one of the largest India focused real estate private equity arm of the HDFC group; with a total capital of 72 billion rupees under its management.

HT PAREKH FOUNDATION 
It is the philanthropic arm of the HDFC group. Focusing to enhance the quality of life of people coming from marginalized and underdeveloped communities.

Offering a variety of financial services under a single umbrella, it has become a financial goliath. But, despite the fact that both HDFC and HDFC Bank are financial institutions, did you know how they work together? How do they avoid competing with one another, and how do they differentiate their businesses? Let's explore…..

HDFC VS HDFC Bank

HDFC Bank is set to take over its parent HDFC in one of the biggest mergers in Indian history. After this mega 40 billion dollar merger, HDFC would be merged into HDFC Bank and Housing Development Finance Corporation (HDFC) as a separate entity would cease to exist.

The prospective merger between these two entities had been speculated for the last six years. 

HDFC’s 83% of loan business came from the network of HDFC Bank and subsidiaries of the HDFC Group. The two companies share a unique direct selling agreement in which HDFC Bank sources a home loan for HDFC, gets fees and then by the end of the quarter buys 70% of the loans from the books of HDFC.

Due to this agreement, HDFC Bank cannot enter the housing loan market in spite of having a larger and superior distribution network. 

This arrangement was not so profitable for either of the entities. Due to lack of deposits, HDFC needs to get funds from HDFC Bank at a higher rate than savings bank interest, which forces it to offer home loans to customers at an interest rate higher than its competitors like Kotak Mahindra Bank and ICICI Bank. This stopped HDFC Bank from selling home loans to its existing customers and as a result of which 70% of the bank’s existing customers have home loans from other lenders.

This merger would enable HDFC Bank to provide home loans at a competitive interest rate. And the interest rate spread would benefit the entity overall. 

As for this merger, for every 25 shares of HDFC a shareholder would get 42 shares of HDFC Bank, in a ratio of around 1:1.68.

Advantages of the merger

Operational efficiency
This would offer a branch optimization and rationalized cost efficiency, as well as operational efficiency as the housing loan department, would be incorporated inside the existing structure; providing a behemoth of financial services.

Providing easy home loans to existing customer base
HDFC Bank is known to have a creme-de-la-creme customer base from a risk and income point of view. This would allow the bank to increase its loan book without any extra efforts.

Long term interest Income
Since home mortgages last for nearly 10-20 years, it allows the bank to enjoy long term interest payments on asset-backed loans on at least a third of its loan book.

Larger Loans
With the infrastructure and finances of a bigger corporation, it could now offer large ticket loans even in the infrastructure sector from which it had refrained itself from. 

Problems relating to the merger

RBI’s approval would be the major decider for this merger. After this merger, HDFC Bank would end up owning 48% of the life insurance business, 69% in the Asset Management Business. Recently, ICICI Bank was asked to bring its holding in ICICI Lombard to 30%. This limit on related party holdings might become a problem going ahead for the HDFC merger.

Any bank as a mandatory requirement has to maintain an SLR and CRR of around 18% and 4% respectively of overall deposits. This would generate a need of 770-800 billion rupees in reserves, due to the increase in deposits of these two entities and differences in the functioning of a bank and NBFC. And also force the merged bank to give out loans worth around 900 billion rupees in the agricultural portfolio as per the PSL norms.

Since now HDFC Bank is the entity that is going to exist, let’s look at its financials;

Financials of HDFC Bank

ROE & ROA

Its ROE has been consistently massive at 16%, far better than its competitors whose ROE stands at just around 8%. ROA is also growing slowly but consistently indicating it is increasing profits with respect to its increase in assets.

Net NPA

NPA stands for Nonperforming Assets, Its net NPA stands at 0.4% of all the advances given by the bank, which is the lowest among its competitors indicating it has a healthy and well-diversified risk portfolio.

NIM

NIM stands for Net Interest margin; it is the spread that the bank earns by the difference in the interest rates it offers to its depositors and its borrowers. A healthy and constant NIM is enjoyed by the bank, and it is expected to increase if the merger is successful.

Deposits

 Its deposits have grown with increased retail lending as well as lending to infrastructure companies.

Profit Growth

The company has shown consistent profit growth since the last 10 years and has increased to more than 10x in only 10 years.

If you want to know more about its financials, strengths, weaknesses, recent performances and view ratings and research reports about HDFC Bank, visit Ticker by Finology and let your curiosity go wild.

Conclusion

“After 45 years of housing finance and 9 million homes provided to Indians, we had to find a home for ourselves. We have found it within our own family and in our own bank,” said Parekh.

On which company would you like our next blog on- Do let us know in the comments below.