Aditya Puri, the longest-serving head of an Indian bank, avoids e-mail and doesn’t carry a mobile phone. That hasn’t stopped HDFC Bank Ltd. from becoming the country’s second-biggest lender by market value.
“Banking is a simple business -- you be too aggressive, it will come back and bite you on your backside,” Puri, 61, said in an interview in his sparsely decorated office at the bank’s Mumbai headquarters, sunlight streaming onto uncarpeted floors.
The managing director, who doesn’t wear a watch and goes home for lunch most days, said he shuns e-mail because most correspondence amounts to “cover your ass” measures that aren’t directed at getting results.
Under Puri, lured from Citigroup Inc. to set up HDFC Bank in 1994, the firm has posted profit increases of at least 30 percent in each of the past 10 years. It has built its credit-card and consumer-lending businesses into India’s largest, steering clear of losses in those areas incurred by rivals such as ICICI Bank Ltd., also based in Mumbai, and Citigroup, the biggest foreign bank by assets.
HDFC Bank, which briefly eclipsed government-owned State Bank of India as the country’s largest lender by market value last month, is the second-best performer on the BSE India Bankex over the past year after its stock declined about 3 percent, compared with a 26 percent fall in the 14-company index. HDFC Bank trades at a price-to-book ratio of 4.4, more than double ICICI Bank’s 1.6. The shares fell 0.2 percent to 465 rupees as of 9:28 a.m. today.
Wells Fargo Model
Now Puri is expanding in investment banking, hiring Rakesh Singh from Rothschild in April and saying he wants to be among the top two or three players advising on mergers and acquisitions, project finance and debt sales within three years. He’s also seeking to emulate San Francisco-based Wells Fargo & Co., the fourth-largest U.S. bank by assets, by selling new products to existing customers to increase profitability.
“I’m a long way before I achieve the Wells Fargo kind of model,” said Puri, who worked at Citigroup for almost 20 years, rising to chief executive officer of Citibank Malaysia before starting HDFC Bank. “But the good part is that if I keep mining my existing customers, that should almost provide me 50 percent of earnings growth going forward.”
The bank, which is adding almost 2 million customers a year, according to Puri, has more than doubled lending to consumers since 2008. That business now accounts for about half of the bank’s total loan book, while ICICI Bank has cut consumer lending by a third, to 35 percent of its portfolio.
“HDFC Bank has had the same quarterly consistency in terms of credit growth across credit cycles,” said Kalpana Morparia, CEO of JPMorgan Chase & Co.’s India unit. “I don’t know of any other bank globally that’s done that.”
HSBC Holdings Plc, the second-largest foreign bank in India by number of branches, has had more than five years of losses in its retail-lending business in the country and is now operating at “virtually break-even,” India CEO Stuart Davis said in an interview in August.
CitiFinancial Consumer Finance India, the Citigroup subsidiary that focuses on home and personal loans, has cut its branches in the country to less than 100 from a peak of 450 in 2007. The business returned to profitability last year after losing 7.3 billion rupees ($142.1 million) on revenue of 24.3 billion rupees in the 12 months ended March 2009 and 4.59 billion rupees in 2010.
ICICI Bank, India’s third-largest publicly traded lender, reported its biggest decline in quarterly profit in more than six years in 2009 as it set aside funds for bad debt and curbed loans to avoid defaults.
Puri, a graduate of Punjab University and a chartered accountant who keeps an autographed copy of Michael Lewis’s “The Big Short” in his office, has earned a reputation for lending caution. The bank’s bad-loan ratio was 0.2 percent in the quarter ended in September, a fourth of ICICI Bank’s and a 10th that of State Bank.
HDFC Bank’s net interest margin -- the difference between what it pays on deposits and charges for loans -- was 4.1 percent for the period compared with ICICI Bank’s 2.6 percent. HDFC Bank, which has about two thirds of the assets of ICICI Bank, has the second-highest net interest margin in the country after Kotak Mahindra Bank Ltd.
“The biggest quality of HDFC Bank is its ability to control itself,” said Samir Arora, founder of Helios Capital Management Pte, a Singapore-based hedge fund whose top holding is HDFC Bank. The bank “doesn’t feel left behind in the good times because it does so much better in the bad times.”
HDFC Bank was set up by Housing Development Finance Corp., India’s biggest private mortgage lender, after the government allowed companies not owned by the state to operate banks in the early 1990s. HDFC remains the lender’s largest shareholder, with more than 23 percent, and sells its home-loan products through the bank.
“With prudent underwriting standards, a conservative provisioning policy, high exposure to consumer credit that is well diversified and a best-in-class, low-cost deposits franchise, HDFC Bank fares exceptionally well in almost all the parameters of our balance-sheet analysis,” Saikiran Pulavarthi, a Mumbai-based analyst at Espirito Santo Investment Bank, wrote in a Nov. 17 note to investors.
Puri, who said he reads about 50 reports a day from senior managers, is known for delegating responsibility. In February 2008, on a weekend when HDFC Bank was in talks with Centurion Bank of Punjab Ltd. to conclude India’s largest banking acquisition, Puri was relaxing at his farmhouse on the outskirts of Mumbai. He said he let Executive Director Paresh Sukthankar complete the deal, which was announced after the weekend.
“I have a very competent management team,” said Puri. “We agree on what needs to be done, and they do it, and they only call me if there’s a problem.”
If they call after work, they “better be very, very sure” it is something crucial, he said.
Puri usually quits work at 5:30 p.m. He said he tries to spend 45 minutes a day with his daughter, an actress who made her Bollywood debut last year. He used to play golf, until a shoulder injury forced him to quit, and he enjoys listening to Urdu sonnets put to music, known as ghazals, and jazz. He’s also fond of single-malt Scotch.
“I don’t know what people do working late,” Puri said. “I can’t find work till 5:30. I’m probably finished by 4.”
Puri, whose compensation for the year that ended March 2010 was 39 million rupees, about a 25th of the $19 million that Wells Fargo CEO John Stumpf earned last year, is a man of simple taste, said Neeraj Swaroop, who used to be in charge of retail banking at HDFC Bank and is now CEO for South Asia at London-based Standard Chartered Plc. Swaroop said that on a team visit to a village in south India Puri’s love for street food led the group of bankers to cancel dinner plans at a fancy restaurant in favor of eating fish and drinking locally brewed alcohol made from coconut palm at a more rustic place.
The next few years may test Puri’s laid-back style. Higher borrowing costs and a slowdown in economic growth as India’s central bank raises rates to curb inflation could lead to an increase in bad loans.
“HDFC has the highest exposure to retail credit with 41 percent of its asset book comprising of retail credit,” Espirito Santo’s Pulavarthi wrote. “Home loans constitute only 18 percent of its retail loan book implying that exposure to riskier consumer products like cars, CV, credit cards and personal loans is the highest among all the banks in India.”
Goldman Sachs, Tata
To become a top player in investment banking, Puri will have to compete with foreign rivals such as Goldman Sachs Group Inc. and Morgan Stanley, as well as domestic conglomerates including Tata Group and Religare Enterprises Ltd., controlled by the billionaire Singh brothers. While he said he wants to be a leader in M&A work in India in the next two or three years, HDFC Bank is not now ranked among the top 72 firms, according to data compiled by Bloomberg.
There also may be more competition in the consumer-lending business as India’s central bank is considering issuing new banking licenses after a seven-year hiatus. Meanwhile, Standard Chartered, HSBC and Citigroup, the foreign banks with the biggest presence in India, continue to add branches as they target middle- and high-income consumers.
Foreign banks have a combined market share of 4.9 percent in lending and 4.4 percent of deposits in the South Asian nation, according to data from the Reserve Bank of India.
Puri said new local banks won’t be competition.
“Will they make a difference to the banking landscape for the next 10 years with new bank licenses?” he said. “The answer is no. First they have to get a license. Then they have to set up basic infrastructure. Then they have to start the business. Then they have to decide which business they’re going to grow in. Then they have to spend the money to grow in that business.”
In a nation where more than 50 percent of the population lives outside the main cities, any new bank also would need a strategy for tapping that market, he said. HDFC Bank already has a head start, having worked on rural expansion for the last seven years, he said.
Investors including Helios Capital’s Arora say even existing banks aren’t much of a threat.
“There’s no competition from any of the private-sector banks,” Arora said. “Everybody wants the HDFC bank model -- consistency of earnings, be diversified in four or five businesses, don’t do overdo things.”
No Global Ambitions
As for global ambitions, Puri said he doesn’t have any. After opening branches in Bahrain and Hong Kong to serve Indians working abroad and companies in need of trade financing, Puri doesn’t intend to expand further. He said he wants to take on only as much risk as will allow the depositor whose money he’s using to sleep at night.
“If you go international today, you’re the one taking higher risks,” he said. “To try and become a major bank is very difficult with the new regulations. You’re getting a lower return and you have a much better market here, so why would we go?”