HDFC Bank's Aditya Puri: Not the biggest, but the best

For HDFC bank's Managing Director, Aditya Puri, a night out for dinner is never just that. Late last year, when this Mumbai-based banker took his top team in Delhi out for a dinner at Pandara Road, he couldn't resist doing a bit of selling on the side. So, off went the 54-year-old Puri, who's been heading the country's #1 bank for 10 years now, hopping from one retail outlet near the restaurant to another, quizzing the store managers on their credit card swiping machines: why were they using a particular bank's terminal, how many transactions did they clock every day, how much commission were they paying the bank? At each of the five outlets that he visited that night, Puri made a case for switching to his own bank's point-of-sale (PoS) terminals, citing the 1 per cent less commission HDFC Bank charged merchant establishments compared to other banks. By next evening, all the five shops were Puri's customers.

A minor triumph? For any other CEO, maybe, but for a man who believes in building his bank, brick by careful brick, it's a victory just the same. Indeed, that's how HDFC Bank came to be the leading player in pos terminals (it's got 40,000 of them), and that's also why other banks in the country are finding it hard to unseat its top-most perch on the Business Today-KPMG survey of India's

Best Banks. What sets the bank apart? It is what most analysts call "quality growth", which means market leadership in terms of quality of earnings, but not necessarily in terms of volumes. According to a recent DSP Merrill Lynch report, "HDFC Bank's ability to consistently deliver quality growth, especially in a rising interest rate environment, is not fully discounted (read: reflected in the share price)." Another brokerage firm, Sharekhan, describes the bank's stock as "an evergreen investment".

The bank's balance sheet size has grown to Rs 42,307 crore, with a net profit growth of 31.45 per cent and business growth of 41.42 per cent. Where's the growth coming from? An expanding footprint and product offerings. The growth is not just in retail, where it is adding nearly 90,000 new customers every month, but also in the corporate or wholesale segment, which continues to clip at an impressive 10 to 15 per cent. Sitting in the sixth-floor corner room at the bank's headquarters at lower Parel in Central Mumbai, Puri spells out his strategy: "Given the fact that the market opportunity is immense, it's a misnomer that you need price competition to get business. So, if business is not an issue, then the bank can be choosy about the customer in terms of returns or lifetime value to the bank." By the way, that's not just talk. The bank's NPAs, or bad loans, as a percentage of net advances are a mere 0.16 per cent versus an industry average of 2.9 per cent. Even that amount of bad loans is covered to the extent of 92 per cent.

Cranking Up Growth

Playing it safe, however, is not the same as not chasing opportunities. The bank has been continuing to gain market share in the retail and corporate spaces, simply because it has continued to expand its reach and muscle into newer product segments. Take the retail business, for example. In the past 12 months, it has opened 100 new branches, taking the total count to 416. Simultaneously, there has been a rapid roll out of offerings: its auto loans are now available in 300 cities compared to just 30 a year ago; personal loans now cover 108 cities versus 28, and its credit card marketing reaches 110 cities as against 17 the same time last year.

QUALITY GROWTH The trick: pick the customers very carefully.

RETAIL » Choose customers who can add lifetime value » Increase penetration and sell more products to the same customer » Leverage technology to better serve customers and tap opportunities » Use distribution strength to market third-party products CORPORATE » Pick top-tier corporates and offer higher-margin services » Integrate with ERP systems of customers to lower costs » Tap customer's suppliers to increase "stickiness" » Focus on relationship in the case of small businesses

In credit cards especially, the bank has met with enormous success. Despite entering the market late by about two years, it claims to be issuing 70,000 new cards every month and to have crossed the coveted 1 million mark. What's more, since 70 per cent of the cards issued are paid cards (that is, credit card fee is paid as against free cards), risks of default are lower. That's a classic example of the bank's preferred strategy of selling more to the existing customer. Incredibly, depending on the product, as much as up to 60 per cent of the new products are sold to existing customers. What helps? The bank's database on customers, which can be mined for information on consumption behaviour of existing customers and predicting their future requirements. And since almost a third of the sales are through branches, the bank doesn't have to pay commission to direct sales agents (DSAs), further improving its own margins. Now the focus is on reducing the turnaround time by 30 per cent for customers. Says Neeraj Swaroop, Country Head (Retail): "This not only increases the business but reduces the cost, giving a sustainable advantage."

The thrust on retail has also helped HDFC Bank increase its fee income and create a pool of stable funds that comes from savings accounts. For instance, retail accounts for about 65 per cent of total fee income, largely driven by the plastics business (credit and debit cards, and pos terminals). Retail deposits and third-party collections offer another advantage: besides being stable, they cost less. As a result, the bank has been able to keep its cost of funds at a low 4.2 per cent (it ranks #5 on the survey on this count) and despite the fluctuations in interest rates, maintain an interest spread for itself of 3 per cent.

In the last few years, while several other banks downsized corporate banking as interest rates went down, HDFC Bank's decision to focus on top corporates has paid off. Says Rajiv Gupta, Joint Managing Director, DSP Merrill Lynch: "HDFC Bank figured out the opportunity by offering solutions to large corporates where margins are high." Today, that's an important contributor to the bank's earnings. But it's not plain vanilla lending that rakes in the moolah. The bank's offerings include many other add-ons such as collaterals, customised supply chain management solutions that combine e-banking and cash management, (the customer's) vendor and distributor financing.

Consider how one such relationship works. In the case of Bharat Petroleum Corporation (BPCL), the bank has integrated into the payment supply chain. For example, when an LPG dealer makes a payment online, that gets logged in BPCL's ERP system (it's from sap) and translates into an order at the oil company's warehouse, which then despatches a truck with the LPG cylinders. There are over 4,500 supply chain management accounts linked to large corporates and the bank's electronic cash management clocks volume at Rs 12,000 crore a month-three times larger than the nearest rival. Says Samir Bhatia, Country Head (Corporate Banking): "Such services lower the transaction costs and time for our customers and fetch tidy returns for us."

"Supply chain management services lower transaction costs and time for our customers and fetch tidy returns for us" Samir Bhatia/Country Head (Corporate Banking)/HDFC Bank

Another revenue stream that the bank is tapping into is SMEs (small and medium enterprises). Over the last three years, it has built a strong business out of lending to small corporates. So much so that it now accounts for 15 per cent of its corporate lendings, and is growing at 50 per cent year-on-year. "Strong relationship management at ground level and centralised credit processes have enabled us to ensure that there is not a single default in this segment," boasts Bhatia.

Innovation For Growth

If you look at HDFC Bank's 10-year history, you'll find that it has evolved at a gap of every two-and-a-half years. That means before 2007 is over, the bank will look different from what it is today. Just how different? Some signs are already evident. Credit cards and housing loans, for one. In credit cards, the bank has recently broken even and this could become one of its largest businesses. In housing loans, the bank entered into an arrangement with its parent Housing Development Finance Corporation (HDFC) Ltd. in September 2003, whereby it sells HDFC home loan products. Going ahead, its Rs 150 crore a month of home loan business that comes via HDFC could easily double the next year.

Then, there are other new businesses. Like the commodity business, where the bank lends against warehouse IoUs, helping farmers cover price risk. Or like the government business, launched two years ago, where the bank collects income, sales and service taxes on behalf of the Central government. It already ranks #3, but is now bidding to do more such collections for railways, utilities and state transport corporations. Says Puri: "If we have to look different every two-and-a-half years, then we have to get 25 to 35 per cent of our earnings from new products."

That explains why his lieutenants are busy scouting new opportunities. Swaroop, for instance, is exploring the possibility of substituting the moneylender, or providing small borrowers access to finance, or lending against gold, especially in south India. Bhatia, on the other hand, is looking at offering outsourced accounting services to corporate clients. But strong growth needs strong capital. So, the bank's board has approved issuance of American depository shares (ADS) in the next quarter. Yet, Puri is more confident than ever. "Compared to where we were earlier, growing from here will be a cakewalk." That, however, doesn't mean he won't go selling when even he's out for a dinner.