Can HDFC Bank Continue to Leverage Efficiency to Offset Rising Credit Costs?


EXECUTIVE SUMMARY. On the eve of HDFC Bank’s 2QFY2020 results (October 19, 2019), an analysis of its profitability for the last 5 years reveals that, while its ROA marginally declined as credit costs increased, it was the leveraging of operating costs which compensated to maintain the bank’s excellent profitability. It appears that the bank has been able to successfully generate higher business through re-engineering its processes, and its digital strategy has contributed to this achievement. The bank has been able to sweat its labour force and existing infrastructure to achieve higher business. The critical issue remains whether the bank can continue with this strategy of leveraging its operating cost in the future. In the current faltering economy, the bank is unlikely to increase its net interest margin and its fees to compensate for the expected higher credit costs and if it is unable to continue with its earlier strategy, shareholders should expect a decline in its profitability.

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