Boring Banks Are Beautiful

An uncomplicated existence serving retail customers does pay dividends.

India's lenders are having their own Deutsche Bank moment.

India's Deutsche Bank Moment

An index of state-run Indian banks has mimicked the decline in the German lender's shares

Source: Bloomberg

The cost of protecting State Bank of India's debt against nonpayment using credit-default swaps surged ahead of the state-owned firm's earnings on Thursday, which when they did come, missed estimates by two thirds. Punjab National Bank's shares meanwhile have cratered 16 percent since Monday as it almost tripled its bad-loan provisions and reported net income that was just 7 percent of consensus expectations. But swimming against the deteriorating asset quality tide is one Indian lender that's quietly gone on to become nearly twice as valuable as Deutsche Bank, a global financier 18 times its size by assets.

Mumbai-based HDFC Bank has the blueprint many financial institutions around the world would crave: a straightforward existence centered on serving millions of small customers, and a reputation for solidity underpinned by an utter lack of interest in dancing at any credit party regardless of the allure of the music. It garners under $4 billion, or less than a quarter of its revenue, from corporate banking; retail banking accounts for 52 percent.

No other major Indian, or Chinese, bank has such a sharp retail focus. Among lenders of roughly the same size in developing Asia, only Thailand's Siam Commercial and Bangkok Bank, and Malaysia's CIMB Group and Public Bank are as honed as it is on mom-and-pop business.

It's an incredibly boring model, but easy to understand. And, more than seven years after Lehman, investors are slowly beginning to wake up to the fact that really, little else matters. All that fancy confidence-inspiring stuff -- capital buffers, asset sales and security buybacks, bold assertions of liquidity and testimonies from other bankers -- is of questionable durable value. When it comes to the crunch, confidence in a bank's balance sheet becomes a function of its borrowers' cash flows. That's when humdrum lenders like HDFC get rewarded:

Simplicity Over Size

An Indian lender now has almost twice the market value of the world's 12th biggest lender by assets

Source: Bloomberg

Even if the present tumult in global banking ebbs without any lasting damage, doubts about the financial systems in China and India will linger. Hedge fund manager Kyle Bass may not be completely off the mark when he says $3.5 trillion of equity could vanish from China's banks if they were to lose 10 percent of their assets to nonperforming loans.

Such an outcome is plausible when you consider that in India, whose credit binge was nowhere as big as its larger neighbor's, more than 11 percent of bank loans are stressed, and a little less than half of them have already soured. Even now, new bad loans are emerging from the woodwork because the central bank has put lenders on a deadline to clean up their act by March next year. China, meanwhile, hasn't even begun to address the problem:

In Denial

The reported bad loan problem is far smaller for Chinese banks than for Indian lenders

Source: Bloomberg

Eventually, all those nonperforming loans will have to be acknowledged and provided for, and lenders made whole again. But authorities in New Delhi and Beijing would be wise to start thinking now about what kind of a banking system they want after the inevitable recapitalizations. When they do, they might want to keep HDFC in mind and remember that in bad times, size, scale and sophistication are no match for simplicity. That's the, very uncomplicated, message from public markets.

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andy Mukherjee in Singapore at

    To contact the editor responsible for this story:
    Katrina Nicholas at

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE