HDFC Bank heads for NYSE

Pre-marketing will begin next week for a second Indian bank hoping to list on the New York Stock Exchange (NYSE).

HDFC Bank, a subsidiary of India's leading mortgage lender, Housing Development Finance Corporation (HDFC), is hoping to raise up to $150 million through a Merrill Lynch and Morgan Stanley-led ADR.

The offering, which should begin roadshows the week beginning July 9, will comprise all primary shares entailing little dilution to HDFC's 28% stake. In addition to representing the second Indian bank to seek an NYSE listing, HDFC Bank will be the first Asian financial institution to raise equity capital this year and as such, will be closely watched.

Bombay-based bankers and analysts believe that the deal will be well received despite the poor performance of its predecessor ICICI Bank, which priced a $175 million ADR in March last year at $11 per unit. The transaction has given investors a negative return of 64.26% on a one-year basis and is currently trading at $5.25 per unit, having hit a low of $4.625 in October last year.  

Indian analysts regard HDFC and ICICI as close comparables and say that the two are regarded as the forerunners of an efficient domestic banking system. Established in 1994, as one of nine new banks licensed by the government, HDFC was fully computerised from day one and commands the lowest NPL ratio of any Asian bank. As of end of the financial year in March, for example, it carried an NPL ratio of just 0.25%.

"Actually, the bank has a completely clean balance sheet since it holds higher general provisions," one analyst comments. "In many Asian countries, investors don't tend to believe financials they are presented with. This has never been the case with HDFC. It is regarded as completely transparent."

At 25 times 2001 earnings, the bank also commands one of highest p/e ratios of any Asian or, indeed, global bank. By comparison, ICICI Bank is trading around the 16 times level, while the sector averages five times. 

However as the analyst adds, "The bank has traded at this level right from day one and is always accorded a high premium by local investors because of its management, growth levels and efficiency."

Both HDFC and ICICI are said to be growing at twice the industry average and analysts believe that they will have a combined market share of about 7% to 8% within the next three to four years. Currently, they only command a 3% market share, but are starting to eat away at state-owned monoliths such as the State Bank of India.

As of end March, HDFC recorded a return on assets (ROA) of just over 2% and a return on equity (ROE) of 22%. This latter figure will come down on completion of the ADR, although analysts say that it should still stand around the 20% level. ICICI had a slightly lower return on both counts, with an ROA of 1.5% and an ROE of 15%.

Investors may also see value in the fact that the stock has come down quite sharply over the past month, falling about 20% "We see a lot of upside from current levels," one analyst concludes. "We have a target price of Rp275"

At Thursday's close, HDFC traded to Rp214, down 3.82% on the year, compared to a 14.942% decline in the Sense 30.