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Seeking a slice of world’s most expensive bank

It’s hard to overstate just how much global investors are captivated by HDFC Bank, India’s biggest lender by market value.

Not only does the stock trade at the highest valuation among the world’s largest banks, but international funds are so bullish that they’re willing to pay a record 20% premium over HDFC’s local stock price to get their hands on the limited number of shares available to foreigners. Brokerage analysts, meanwhile, have more buy ratings on the company than at any other time in 14 years.

While sceptics say the stock has become too expensive, IDBI Capital Market Services, the most accurate forecaster of HDFC shares in the past year, predicts valuations have even further to climb. The bank has reported annual profit growth of at least 20% every year since 1998, a feat unmatched by any of the world’s 200 biggest lenders, and analysts say the firm will maintain that pace through at least March 2017.

HDFC also stands to benefit if Prime Minister Narendra Modi succeeds in his efforts to revive Asia’s third-largest economy.

“Foreigners want the very best and they don’t get too hung up on valuations if the book is attractive,” said Jignesh Shial, a Mumbai-based analyst.

“A 30% to 35% annual growth in earnings over the next three years is possible. If profit rises at that pace, there’s room for valuations to go higher.”

Led by managing director Aditya Puri, a 20-year veteran of Citigroup before he joined the Indian lender in 1994, HDFC has maintained such consistent profitability by limiting exposure to heavily-indebted Indian corporations and lending to the country’s growing middle class. The bank, which has the third-biggest weighting in the benchmark S&P BSE Sensex, has climbed 9% this year after a 43% surge in 2014.

Foreign investors, who plowed more money into Indian stocks this year than any other Asian nation, can’t buy the lender’s shares from the open market because overseas holdings have reached the country’s 49% ownership limit.

That’s causing the stock to trade at a premium in India’s foreign segment, where global investors go after holdings reach the cap. The gap widened to a record 20.7% on April 8. It was at 16.8% yesterday.

“Stocks that offer compelling growth profiles and good corporate governance trade at a premium, and HDFC Bank fits that bill,” said Jonathan Schiessl, the head of equities at Channel Islands-based Ashburton Investments, which oversees $12bn.

Gains in HDFC Bank’s shares will probably level out after valuations increased, according to Supreeth Shankarghal, a director at QF Assets Ltd, a hedge fund in Bengaluru.

“Don’t buy HDFC Bank unless you are in it for the long haul,” said Shankarghal.

“The stock is expensive. It may consolidate for a while.”

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