HDFC Bank (HDFCB IN)€¦ · Higher stress noticeable from Agri, Unsecured & Vehicle loans (Auto/CV).☑ Yields on retail remain stable, while cost of funds has been beneficial. Analysis

August 12, 2019 1

Rating: BUY | CMP: Rs2,285 | TP: Rs2,732

Best placed despite challenging environment

Quick Pointers

Higher stress noticeable from Agri, Unsecured & Vehicle loans (Auto/CV).

Yields on retail remain stable, while cost of funds has been beneficial.

Analysis of HDFCB’s 20F filings show (i) Quality retail franchise built-up in

both liabilities and assets (ii) Early stress levels & delinquencies have risen

in retail with increased credit costs & write-offs and (iii) bank remarkably

maintains its track record of low concentration to single group Top 10

accounts. We slightly increase our credit cost estimates and lower other

income for FY20/FY21. We reduce our target multiple to 3.7x from 3.95x given

the uncertain environment and roll forward of our target to Sep-21 ABV.

Retain BUY with revised TP of Rs2,732 (from Rs2700).

Rising stress in parts of retail quite visible: Retail NPLs scaled up to 1.6%

with 24bps YoY increase in GNPL. This contributed to headline NPAs.

Auto/Unsecured/CV+CE/Others (mainly Agri) witnessed increase in NPLs by

45bps/34bps/17bps/34bps to 1.4%/1.5%/1.0%/2.9% in FY19. Even the early

stress indicators (31-90dpd) have seen steady increase with similar ratios in

unsecured & CV/CE, while Auto was stable. Positive trend is observed in

business banking with NPLs stabilizing at around 2.0% with early stress

coming off.

Retailing in many ways: Bank’s position on liabilities remains strong with 77%

deposits being retail. For a stable and long-term deposit base, Bank has opted

to grow its Retail TDs faster improving its mix in retail to 54%, as seen back in

FY14, although CASA as well is largely retail but has grown slower. Other

liability constituents like salary account franchise, which remains steady at 28%

of Savings, its association with Govt as interface for collections of taxes

generates it a float of 134% of CASA and stable NR franchise at 11% of

deposits. On assets side, bank just runs a 3% (Rs300bn) credit substitute

book coming off from 6.5% in FY17 & 4.2% in FY18. In addition, its

concentration to Top10 exposures has come down to 64% of capital funds from

100% in FY15, while single group exposure is now at 26% down from mid-30s.

Retail mix (consolidated internal) is maintained at 65-70% over the years, with

63% of book in the 1-5Yrs duration. Although, reduction in fixed rate book by

~200bps over FY17-19 to 59% is likely to be NIM negative in current benign

rate scenario.

Bank remains in much better position than its peers: Bank has been

emphasizing on stress in Agri for last few quarters and putting caution on the

unsecured portfolio, evident from 20F filing. Hence, we increase our estimate

on credit cost by 5bps to 90bps for FY20 (apart from contingent provisions).

Although there could be near term headwinds, we believe impairment ratios

remains one of the lowest in industry. Better pricing power and high risk

adjusted NIMs (despite coming down) will help balance sheet to be resilient

with ROEs of 16-17%, which is commendable in this environment.

HDFC Bank (HDFCB IN)

August 12, 2019

Company Update

☑ Change in Estimates | ☑ Target | Reco

Change in Estimates

Current Previous

FY20E FY21E FY20E FY21E

Rating BUY BUY

Target Price 2,732 2,700

NII (Rs. m) 583,183 696,624 583,294 696,952

% Chng. - -

Op. Profit (Rs. m)482,315 576,445 482,426 578,800

% Chng. - (0.4)

EPS (Rs.) 92.5 111.4 93.6 112.5

% Chng. (1.2) (1.0)

Key Financials - Standalone

Y/e Mar FY18 FY19 FY20E FY21E

NII (Rs bn) 401 482 583 697

Op. Profit (Rs bn) 326 397 482 576

PAT (Rs bn) 175 211 252 304

EPS (Rs.) 67.8 79.3 92.5 111.4

Gr. (%) 18.6 16.9 16.8 20.4

DPS (Rs.) 10.9 12.4 19.0 18.0

Yield (%) 0.5 0.5 0.8 0.8

NIM (%) 4.4 4.4 4.5 4.6

RoAE (%) 17.9 16.5 15.9 16.8

RoAA (%) 1.8 1.8 1.9 1.9

P/BV (x) 5.6 4.2 3.7 3.2

P/ABV (x) 5.9 4.3 3.9 3.4

PE (x) 33.7 28.8 24.7 20.5

CAR (%) 14.8 17.1 16.6 15.8

Key Data HDBK.BO | HDFCB IN

52-W High / Low Rs.2,498 / Rs.1,880

Sensex / Nifty 37,582 / 11,110

Market Cap Rs.6,248bn/ $ 88,302m

Shares Outstanding 2,734m

3M Avg. Daily Value Rs.15372.88m

Shareholding Pattern (%)

Promoter’s 26.25

Foreign 38.64

Domestic Institution 18.18

Public & Others 16.93

Promoter Pledge (Rs bn) -

Stock Performance (%)

1M 6M 12M

Absolute (3.7) 7.9 8.1

Relative (0.8) 4.9 9.4

Pritesh Bumb

[email protected] | 91-22-66322232

Prabal Gandhi

[email protected] | 91-22-66322258

HDFC Bank

August 12, 2019 2

Asset Quality – Stress visible in parts of Retail

HDFCB maintains lowest stress & NPA ratios compared to peers but the Bank has

witnessed strong growth in its retail portfolio over last few years and hence on the

margin has seen deterioration in its asset quality. Bank has been able to reduce its

wholesale NPAs but retail has seen increase in both early stress & delinquencies

(reported under US-GAAP that could be different from I-GAAP).

In its interactions for last few quarters, the Bank has been emphasizing on Agri

stress, while in last two quarters had cautioned on retail growth especially the

unsecured loans where the bank witnessed a strong growth of 30-35% in last two

years. Stress is becoming quite evident from the early level stress (31-90dpd)

disclosures in the 20F filings, screening an inch up in Agri, unsecured & CV/CE but

stable in Auto loans, which has been seeing slower growth.

Retail NPLs have steadily increased from ~0.9% in FY15 to 1.6% in FY19. Sharp

jump has come from Agri (in other retail), Auto & CV/CE loans and up trending in

unsecured loans as well (Exhibit 5).

Areas where stress has reduced is in retail business banking where bank had faced

higher delinquencies in the past has now stabilized and early stress as well has

reduced from 1.1% in FY16 to 0.6% in FY19. Also, Wholesale NPAs have seen

improvement over last two years from 51bps of loans to 42bps of loans.

Higher stress and delinquency has led to higher credit cost of 100bps in retail

portfolio with PCR maintained in range of 65-66%, but in the last few years’ bank

has resorted to higher write offs in most retail segments (except housing). Despite

write-offs bank has also been able to maintain 40-50% recovery from written-off

accounts (on base of previous year).

Retail NPAs share in overall NPAs have been

increasing

0.7

%

0.6

%

0.6

%

0.6

%

0.7

%

0.7

%

0.9

%

1.0

%

1.1

%

0.6

%

0.4

%

0.3

%

0.3

%

0.3

%

0.3

% 0.5

% 0.4

%

0.4

%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

HDFCB Retail NPLs HDFCB Non-retail NPLs

Source: Company, PL

NPL ratio in retail also has inched up quite

significantly

1.1%

0.8% 0.8%1.0% 0.9%

1.1%

1.3%

1.5%

1.6%

0.30%

0.50%

0.70%

0.90%

1.10%

1.30%

1.50%

1.70%

1.90%


HDFCB Retail NPL Ratio

Source: Company, PL

HDFC Bank

August 12, 2019 3

Both early delinquency and impairment has

increased

0.8%0.7%

0.9% 0.9%0.8% 0.7%

0.9%1.0%

1.2%

1.1%

0.8% 0.8%1.0% 0.9%

1.1%

1.3%1.5%

1.6%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Retail loans in 31-90 dpd Retail loans +91 dpd

Source: Company, PL

Intensity of unsecured NPA has reduced in overall

NPA & even within unsecured loans

14%

15%

16%

14%

11%

31%

28%

26%

0%

5%

10%

15%

20%

25%

30%

35%

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Unsecured GNPAs % of Unsecured Loans

Unsecured GNPAs % of NPAs

Source: Company, PL

+91dpd loan trends – Other retail shows significant rise largely in Agri followed by unsecured & CV/CE

0.4% 0.3% 0.3% 0.5% 0.6% 0.8% 0.8% 1.0% 1.4%0.8% 0.5% 0.5% 0.6% 0.6%0.7% 0.8% 0.9%

1.0%2.5%

1.8% 1.4% 1.4% 1.5%2.0%

2.3% 2.0%

2.0%0.5%

0.7% 1.3%2.2% 1.8%

1.4%1.3% 1.2%

1.5%

0.4%

0.3%0.2%

0.1% 0.1%0.3%

0.4% 0.5%

0.4%2.6%

1.4% 0.9%

0.8% 0.8%

0.9%

1.6%2.6%

2.9%


Auto PL/CC Biz bkng CV/CE Housing Other retail

Source: Company, PL

31-90dpd loan trends – Stress lowering in Biz banking, while steadily up in unsecured loans

0.4% 0.3% 0.4% 0.6% 0.5% 0.6% 0.5% 0.5% 0.5%

1.0%0.6% 0.8% 0.6% 0.5% 0.7% 0.6% 0.7% 0.8%

0.7%

0.6%0.9% 0.7% 0.8%

1.1%0.9% 0.8% 0.6%

0.6%0.9%

2.4% 2.7%

1.8%1.4%

1.3% 1.2% 1.3%0.1%

0.1%

0.0% 0.0%

0.0% 0.0%

0.0% 0.0% 0.0%

2.5%

1.6%

1.0% 0.9%

0.9% 0.5% 1.6%1.0% 1.0%


Auto PL/CC Biz bkng CV/CE Housing Other retail

Source: Company, PL

HDFC Bank

August 12, 2019 4

Retail credit cost inched up in Auto & other retail

(Agri KCC)

1.1%

0.6%

0.7% 0.8% 0.7% 0.7%

0.9%1.0%

1.1%

0.5%

0.2%

0.0%

0.2%0.3%

0.1%

0.3%

0.2% 0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Retail CC Wholesale CC

Source: Company, PL

Bank has done higher write-offs in unsecured,

other retail (Agri) & Auto

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Retail W.offs Auto PL/CC Other retail

Source: Company, PL

Strong build-up in PCR in other retail (largely Agri)

PCR FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Retail PCR 79% 73% 64% 64% 63% 65% 62% 64%

Auto 48% 45% 43% 45% 47% 46% 43% 45%

PL/CC 70% 69% 64% 62% 59% 62% 61% 61%

Biz bkng 91% 87% 79% 71% 69% 73% 73% 72%

CV/CE 62% 57% 56% 65% 75% 72% 69% 58%

Housing 67% 69% 57% 52% 38% 44% 51% 51%

Other retail 83% 84% 58% 62% 58% 60% 57% 69%

Source: Company, PL

Bank has been able to maintain lower delinquencies & credit cost due to its ability

on strong pricing power and lower cost of funds aiding risk-adjusted margins.

Though the yields have come off in retail, bank has been able to maintain high NIMs

through mix change and create contingency provisions for stress scenarios.

Yields have been coming off especially in retail

as fixed book continued to contract

8.0%9.2%

9.9% 9.8% 9.9%9.3% 8.9%

8.1% 8.5%

12.2%12.8% 12.6% 12.4% 12.1% 11.7% 11.5% 11.1%11.1%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%


Wholesale Yields Retail Yields

Source: Company, PL

Strong & diversified build-up in deposits has led

to lower funding cost

6.4%

8.6%9.0%

8.2% 8.0%7.7%

7.1%6.5% 6.7%

4.0%

4.9%5.2% 5.1% 5.0% 4.9%

4.6% 4.4% 4.5%

3.5%4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.8% 3.6%


Cost of Savings Cost of TDs Cost of Funds

Source: Company, PL

HDFC Bank

August 12, 2019 5

Liabilities franchise unequivocally best in class

On an analysis of HDFCBs 20F filings disclosures, it reinforces our view why

HDFCB ranks as the best in deposit liability franchise. Retail deposit mix has

improved from 67% in FY11 to 77% in FY19, displaying CAGR of 22.5% over same

period with same continuing at 20% CAGR over FY15-FY19. The bank has been

consciously growing higher retail TDs (27% CAGR over FY11-19) than retail CASA

(18.5% CAGR over FY11-19) to make its business model much stable and robust.

It was also a function of reduction in SA rate by 50bps to current 3.5%. As a result

of this strategy, Retail TDs improved from 40% in FY11 to 54% in FY19, while retail

CASA reduced to 54% in FY19 from 60% in FY11.

Despite the above strategy of raising higher TD in retail, bank has been able bring

down its cost of TDs from 8.5-9.0% in FY12/13 to 6.5-7.0% in FY19 and also cost

of SA came off to 3.6% in FY19 from 3.8% in FY18 (which implies SA balances are

granular).

Strong move towards retail deposits

67%

72%

75%

78%

79%

80%

79%

74%

77%

33%

28%

25%

22%

21%

20%

21%

26%

23%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Retail Deposit Mix Wholesale Deposit Mix

Source: Company, PL

Strategy has been to increase retail TDs 60%

54%

52%

47%

46%

45%

51%

50%

46%

40%

46%

48%

53%

54%

55%

49%

50%

54%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Retail CASA % Retail Dep. Retail TDs % Retail Dep.

Source: Company, PL

HDFCB has been able to lower its cost of funds led by its strong advantage of

raising significant floats from different avenues for being a primary banker for

individuals, corporate and other entities. Bank runs one of the biggest corporate

salary franchise with ~29% share in SA share being from corporate salary accounts

which has been commendably stable for last few years’ despite other bank also

offering similar salary account proposition.

In addition to above, HDFCB is one of the few banks which has strong share in tax

collection of both central & state governments for direct and GST collections. In

FY19, it collected Rs5.2trn of total taxes with 21% YoY growth that is equivalent to

134% of CASA float (Exhibit 18), its direct tax collection is 28% of central Govt’s

total direct taxes.

HDFCB also has strong NRI franchise helping it garner decent NRI deposits which

is 11% of total deposits and has ~11% market share in domestic NRI deposits.

HDFC Bank

August 12, 2019 6

Share of salary a/c in SA has been maintained

27%

34%

34%

38%

34%

32%

31%

31%

29%

29%

28%

29%

29%

29%

29%

43%

48%47%50%

45%48%

53%53%

44%44%

20%

25%

30%

35%

40%

45%

50%

55%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

HDFCB Salary A/c Share to SA

By Value By Accounts

Source: Company, PL

NRI deposits have been steady source of funds

Source: Company, PL

Strong tax collection trends

70

0

800

98

9

1,1

45

1,2

25

11

45

12

25

1394

1690

26

13

31

56

160 200300 370

583 722 870

1246

1522

1874

2076

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Direct tax collections (Rs bn) Indirect tax collections (Rs bn)

Source: Company, PL

Significant share in Govt’s direct tax collections

21.0%

21.2%

22.2%

23.2%

22.1%

22.0%

24.6%

25.7%

26.1%

26.7%28.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%F

Y09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

HDFCB Direct Tax Collection Share to Govt's DirectTaxes

Source: Company, PL

Tax collection float is equivalent +130% of total CASA

136%

115% 117%

127% 129% 129% 129% 132%

119%

131% 134%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Tax collection float to CASA

Source: Company, PL

5.4%

7.0%

9.8%

15.7% 15.4% 15.5%

11.3%

10.4% 11.1%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

0

200

400

600

800

1000

1200

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

NR deposits (Rs bn) % of deposits

HDFC Bank

August 12, 2019 7

Retailization to the core; reducing concentration

HDFCB has steadily increased retail’s share in overall mix (consolidated USGAAP

with internal classification) and further analysis shows it has steadily increased its

retail book in mid-duration for 1-5 years and remains a major share, while one-third

book is lower than a year. In the wholesale book, duration of book is largely at 1-

year but with a small mix of loans has steadily increased in the above 5-years

duration. In addition, it has reduced its credit substitute portfolio to half from peak

6.5% of customer assets in FY17 to 3.2% in FY19.

Although, bank has seen decrease in its fixed rate loans to 60% (Exhibit 23 & 24)

which should be negative in this benign interest rate environment. Further, 50% of

its fixed loan book will mature within 1-year. The bank will have to manage its loan

spreads through lower cost of funds & variable loan book that has 57% of loans in

1-5 year bucket.

Bank has been achieving overall PSL and its sub-targets barring direct Agri,

although in last few years has closed the gap with regulatory target helping in lower

RIDF calls. Higher PSL push in Agri despite deterioration in asset quality has helped

NIMs to certain extent considering yields are higher than RIDF, although looking at

deterioration and early stress risk adjusted margins could be under pressure.

Retail loans (internal) share has improved

59%

66%

68%

68%

69%

69%

68%

71%

68%

41%

34%

32%

32%

31%

31%

32%

29%

32%


Retail Loans Mix Wholesale Loans Mix

Source: Company, PL

Bank has lowered its reliance in credit subs

0.9% 0.6%

1.8% 2.0%

4.7%

5.6%

6.5%

4.2%

3.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

-

50

100

150

200

250

300

350

400

450

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

(Rs

bn

)

CPs NCDs Credit Subs to Customer assets

Source: Company, PL

Retail loans share has improved in 1-5yr bucket

34% 33% 31% 29% 29% 33% 29% 30% 31%

56% 58% 59% 62% 62% 59% 62% 63% 63%

10% 9% 9% 9% 9% 8% 9% 6% 7%


Retail Loans Duration Mix

Loans <1Yr Loans from 1Yrs to 5Yrs Loans above 5Yrs

Source: Company, PL

Wholesale have been steady in <1Yr bucket

59% 53% 57% 56% 56% 54% 55% 52% 54%

35%40% 37% 37% 36% 38% 36%

34% 31%

6% 7% 7% 7% 8% 8% 10% 15% 15%


Wholesale Loans Duration Mix

Loans <1Yr Loans from 1Yrs to 5Yrs Loans above 5Yrs

Source: Company, PL

HDFC Bank

August 12, 2019 8

Fixed rate share has been coming down steadily

74

.0%

73.0

%

66.1

%

64.2

%

59.5

%

59.2

%

61.1

%

60

.9%

58.9

%

26

.0%

27.0

%

33.9

%

35.8

%

40.5

%

40.8

%

38.9

%

39

.1%

41.1

%


Sensitivity of interest rate on total gross loans

Fixed Portfolio Variable Portfolio

Source: Company, PL

Credit Subs help marginally on fixed loans

74

.2%

73.2

%

66.8

%

64.9

%

61.4

%

61.5

%

63.6

%

62

.5%

60.1

%

25

.8%

26.8

%

33.2

%

35.1

%

38.6

%

38.5

%

36.4

%

37

.5%

39.9

%


Sensitivity of interest rate on total customer assets

Fixed Portfolio Variable Portfolio

Source: Company, PL

Bank has been able to achieve its PSL target but seeing shortfall in direct agri but better in FY19

Priority Sector Lending FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Agri 247 292 324 392 529 632 735 743

MSME 248 296 363 455 683 786 814 1,168

Others 148 185 215 222 217 224 205 296

Total PSL Lending 643 773 902 1,069 1,429 1,641 1,754 2,207

PSL as % of ANBC 40.0% 40.0% 46.1% 44.1% 47.9% 43.0% 41.2% 41.9%

RIDF Deposits (Rs bn) 127.6 142.7 151.2 148.2 137.2 118.8 133.6 108.3

PSL Mix

Agri 15.3% 15.1% 16.5% 16.2% 17.7% 16.6% 17.3% 14.1%

MSME 15.5% 15.3% 18.6% 18.8% 22.9% 20.6% 19.1% 22.2%

Others 9.2% 9.6% 11.0% 9.2% 7.3% 5.9% 4.8% 5.6%

Direct Agriculture lending 11.6% 12.6% 12.2% 13.3% 13.2% 14.6%

Small & Marginal Farmers 5.75% 5.53% 7.30%

Weaker sections 4.40% 6.00% 6.25% 6.57% 9.09% 8.59% 10.20%

Source: Company, PL

HDFCB is bringing down its concentration of advances by reducing both Top 10

largest exposures & single group exposures. Top 10 wholesale exposures of the

bank came down to 64% of capital from +100% in FY15 and 70% in FY18 (also due

to capital raise). In addition, exposures to single group (with same management)

have been bought down and significantly lower than the 40% cap.

Significantly lowering share to large exposures

326.5

394.7

455.2

496.7

558.5

607.7

568.0

651.4

918.7

113%104%100% 97% 101%

86%

69% 70%64%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0

200

400

600

800

1000

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Top10 Large Exposures (Rs bn) % of capital funds

Source: Company, PL

De-risking from concentration to single group

29.4% 28.0%

34.6%38.3% 39.6%

34.9%29.6%

32.9%

26.3%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Grp Exposure with same mgmt control as % of capitalfunds

Source: Company, PL

HDFC Bank

August 12, 2019 9

Steady build in franchise prime focus

HDFCB has been able to build strong franchise over the years with currently 5,103

branches in 2,748 cities and over 49mn customer base rising at 13% CAGR over

last FY11-FY19. Bank added 5.6mn customer in FY19 up from average 3.9mn

annual customer addition over FY16 to FY18. Bank has improved its credit card

penetration towards existing customers from 18% in FY14 to 25% in FY19 and is

steady from FY18.

HDFCB is focused to improve its reach even in the remote of areas (13% of

branches opened in unbanked areas) and is continuously improvising its

technology network thereby creating a strong brand awareness.

Debit card growth has been slower than

customer growth, while credit card penetration increasing

10%

20%

30%

40%

50%

60%

70%


Debit Card Base/Total Customers

Credit Card Base/Total Customers

Source: Company, PL

Customer base accretion has been at steady

pace and close to 50mn

0%

5%

10%

15%

20%

25%

30%

35%

0.0

10.0

20.0

30.0

40.0

50.0

60.0F

Y11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

Customer Base (mn) Growth in customers (RHS)

Source: Company, PL

Bank has doubled its unbanked areas in last five

years with share at 13% of total branches

319 468 496 481 516 669

9.4%

11.7%11.0%

10.2%10.8%

13.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

100

200

300

400

500

600

700

800

FY14 FY15 FY16 FY17 FY18 FY19

Branches in unbanked areas Unbanked % to total

Source: Company, PL

Share between SU-RU & ME-UR branches has

been steady

55%47% 46% 45% 45% 46% 47% 47%

45%53% 54% 55% 55% 54% 53% 53%

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Metro/Urban Semi-Urban/Rural

Source: Company, PL

HDFC Bank

August 12, 2019 10

Bank incurred capex of Rs16.1bn in FY19 v/s Rs9.2bn in FY18 & Rs12.6bn in FY17

towards building branch presence and technology – digital, data center & hardware.

Though bank’s capex has been lower than budgeted (which may be in view of

control of operating expenses & a significant build-in base), it now stands at 9-10%

of other operating expenses.

Actual capex has been lower than budgeted from

last few years…

5.9

15.1

13.7

5.8

8.1

12.1

12.0

16.1

20.2

21.9

5.8

7.9

10.0

9.7

8.9

10.0

12.6

9.2

16.1

2.04.06.08.0

10.012.014.016.018.020.022.024.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20E

Capex Budgeted (Rs bn) Capex Actual (Rs bn)

Source: Company, PL

…although capex as % of opex is inching up

again

13% 13% 14%

12%

10%9%

10%

6%

9%

10%

5%

7%

9%

11%

13%

15%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20E

Capex to Other Opex (%)

Source: Company, PL

Strong operating profitability but slower accretion to RoE on

higher provisions

RoA decomposition FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Interest income 8.96 9.27 8.64 8.32 8.57 8.91 9.04 9.11

Interest expenses 4.82 5.02 4.51 4.17 4.40 4.57 4.60 4.60

Net interest income 4.14 4.25 4.13 4.16 4.18 4.34 4.44 4.51

Treasury income 0.29 0.30 0.30 0.25 0.18 0.16 0.14 0.14

Other Inc. from operations 1.38 1.35 1.23 1.33 1.34 1.35 1.33 1.29

Total income 5.80 5.90 5.66 5.74 5.71 5.85 5.91 5.94

Employee expenses 0.88 0.88 0.81 0.71 0.67 0.66 0.65 0.63

Other operating expenses 1.71 1.74 1.65 1.65 1.59 1.59 1.59 1.57

Operating profit 3.22 3.29 3.21 3.38 3.44 3.59 3.67 3.74

Tax 0.94 0.98 0.95 0.96 0.96 0.99 1.02 1.04

Loan loss provisions 0.38 0.42 0.45 0.61 0.65 0.73 0.72 0.72

RoAA 1.89 1.89 1.81 1.81 1.83 1.88 1.93 1.98

RoAE 19.37 18.26 17.95 17.87 16.50 15.88 16.82 17.57

Source: Company Data, PL Research

HDFC Bank

August 12, 2019 11

We increase credit cost estimates marginally to 90bps of loans

and slightly reduce other income

Rs (mn) Old estimates Revised estimates % change

FY20E FY21E FY20E FY21E FY20E FY21E

Net interest income 583,294 696,952 583,183 696,624 (0.0) (0.0)

Operating profit 482,426 578,800 482,315 576,445 (0.0) (0.4)

Net profit 255,035 306,458 252,024 303,511 (1.2) (1.0)

EPS, Rs. 93.6 112.5 92.5 111.4 (1.2) (1.0)

ABVPS, Rs. 592.5 681.6 591.8 679.5 (0.1) (0.3)

Price target, Rs. 2,700 2,732 1.2

Recommendation BUY BUY

Source: Company, PL

We revise our TP to Rs2,732 (from Rs2,700) based on 3.7x Sep

FY22 ABV (rolled over from Mar-21 ABV)

PT calculation and upside

Market risk premium 6.5%

Risk-free rate 7.0%

Adjusted beta 1.04

Terminal Growth 5.0%

Cost of equity 13.8%

Fair price - P/ABV 2,732

Target P/ABV 3.7

Target P/E 22.3

Current price, Rs 2282

Upside (%) 19.7%

Dividend yield (%) 0.9%

Total return (%) 20.6%


HDFCB one year forward P/ABV trend

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

4.7

Aug-1

3

Nov-1

3

Feb-1

4

May-1

4

Aug-1

4

Nov-1

4

Feb-1

5

May-1

5

Aug-1

5

Nov-1

5

Feb-1

6

May-1

6

Aug-1

6

Nov-1

6

Feb-1

7

May-1

7

Aug-1

7

Nov-1

7

Feb-1

8

May-1

8

Aug-1

8

Nov-1

8

Feb-1

9

May-1

9

Aug-1

9P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD


HDFC Bank

August 12, 2019 12

Income Statement (Rs. m)


Int. Earned from Adv. 626,618 775,441 955,565 1,145,533

Int. Earned from invt. 162,224 199,975 228,390 259,327

Others 13,572 14,304 12,915 12,685

Total Interest Income 802,414 989,720 1,196,870 1,417,544

Interest Expenses 401,465 507,288 613,686 720,920

Net Interest Income 400,949 482,432 583,183 696,624

Growth(%) 21.7 19.1 19.3 18.0

Non Interest Income 152,203 176,259 202,698 231,075

Net Total Income 553,152 658,690 785,881 927,699

Growth(%) 17.0 22.1 20.0 17.8

Employee Expenses 68,057 77,618 89,260 102,203

Other Expenses 149,783 172,175 200,584 234,282

Operating Expenses 226,904 261,194 303,566 351,254

Operating Profit 326,248 397,497 482,315 576,445

Growth(%) 26.8 21.8 21.3 19.5

NPA Provision 49,104 63,941 80,752 93,316

Total Provisions 59,275 75,501 97,546 113,070

PBT 266,973 321,996 384,769 463,375

Tax Provision 92,106 111,215 132,745 159,864

Effective tax rate (%) 34.5 34.5 34.5 34.5

PAT 174,867 210,781 252,024 303,511

Growth(%) 20.2 20.5 19.6 20.4

Balance Sheet (Rs. m)


Face value 2 2 2 2

No. of equity shares 2,595 2,723 2,723 2,723

Equity 5,190 5,447 5,447 5,447

Networth 1,062,950 1,492,064 1,682,127 1,926,939

Growth(%) 18.8 40.4 12.7 14.6

Adj. Networth to NNPAs 26,010 32,145 38,599 37,826

Deposits 7,887,706 9,231,409 10,893,063 12,962,745

Growth(%) 22.5 17.0 18.0 19.0

CASA Deposits 3,430,928 3,911,981 4,422,584 5,314,725

% of total deposits 43.5 42.4 40.6 41.0

Total Liabilities 10,639,343 12,445,407 14,434,315 16,942,191

Net Advances 6,583,331 8,194,012 9,750,874 11,701,049

Growth(%) 18.7 24.5 19.0 20.0

Investments 2,422,002 2,905,879 3,296,158 3,793,418

Total Assets 10,639,343 12,445,407 14,434,315 16,942,191

Growth (%) 23.2 17.0 16.0 17.4

Asset Quality


Gross NPAs (Rs m) 86,070 112,242 134,569 134,075

Net NPAs (Rs m) 26,010 32,145 38,599 37,826

Gr. NPAs to Gross Adv.(%) 1.3 1.4 1.4 1.1

Net NPAs to Net Adv. (%) 0.4 0.4 0.4 0.3

NPA Coverage % 69.8 71.4 71.3 71.8

Profitability (%)


NIM 4.4 4.4 4.5 4.6

RoAA 1.8 1.8 1.9 1.9

RoAE 17.9 16.5 15.9 16.8

Tier I 13.3 15.8 14.9 14.4

CRAR 14.8 17.1 16.6 15.8


Quarterly Financials (Rs. m)

Y/e Mar Q2FY19 Q3FY19 Q4FY19 Q1FY20

Interest Income 241,995 258,903 263,333 273,916

Interest Expenses 124,362 133,135 132,438 140,973

Net Interest Income 117,634 125,768 130,895 132,943

YoY growth (%) 25.4 29.7 24.2 20.1

CEB 32,956 36,468 36,921 35,516

Treasury - - - -

Non Interest Income 40,156 49,210 48,712 49,703

Total Income 282,151 308,113 312,045 323,618

Employee Expenses 19,092 19,676 20,744 22,174

Other expenses 43,898 47,517 50,427 48,999

Operating Expenses 62,991 67,193 71,171 71,173

Operating Profit 94,799 107,784 108,436 111,472

YoY growth (%) 21.3 27.5 22.1 28.9

Core Operating Profits 95,127 103,044 106,147 109,352

NPA Provision 15,725 17,346 14,312 24,135

Others Provisions 18,200 22,115 18,892 26,137

Total Provisions 18,200 22,115 18,892 26,137

Profit Before Tax 76,599 85,669 89,544 85,336

Tax 26,543 29,810 30,693 29,654

PAT 50,057 55,859 58,851 55,682

YoY growth (%) 20.6 20.3 21.5 21.0

Deposits 8,333,641 8,525,019 9,231,409 9,545,537

YoY growth (%) 20.9 22.0 17.0 18.5

Advances 7,508,381 7,809,512 8,194,012 8,297,298

YoY growth (%) 24.1 23.7 24.5 17.1

Key Ratios


CMP (Rs) 2,285 2,285 2,285 2,285

EPS (Rs) 67.8 79.3 92.5 111.4

Book Value (Rs) 410 548 618 708

Adj. BV (70%)(Rs) 388 526 592 680

P/E (x) 33.7 28.8 24.7 20.5

P/BV (x) 5.6 4.2 3.7 3.2

P/ABV (x) 5.9 4.3 3.9 3.4

DPS (Rs) 10.9 12.4 19.0 18.0

Dividend Payout Ratio (%) 19.4 19.2 24.6 19.3

Dividend Yield (%) 0.5 0.5 0.8 0.8

Efficiency


Cost-Income Ratio (%) 41.0 39.7 38.6 37.9

C-D Ratio (%) 83.5 88.8 89.5 90.3

Business per Emp. (Rs m) 164 178 206 242

Profit per Emp. (Rs lacs) 20 21 25 30

Business per Branch (Rs m) 3,023 3,415 3,781 4,221

Profit per Branch (Rs m) 37 41 46 52

Du-Pont


NII 4.16 4.18 4.34 4.44

Total Income 5.74 5.71 5.85 5.91

Operating Expenses 2.35 2.26 2.26 2.24

PPoP 3.38 3.44 3.59 3.67

Total provisions 0.61 0.65 0.73 0.72

RoAA 1.81 1.83 1.88 1.93

RoAE 17.87 16.50 15.88 16.82


HDFC Bank

August 12, 2019 13

Price Chart Recommendation History

No. Date Rating TP (Rs.) Share Price (Rs.)

1 4-Jul-19 BUY 2,700 2,484

2 21-Apr-19 BUY 2,700 2,293

3 5-Apr-19 BUY 2,371 2,306

4 19-Jan-19 BUY 2,371 2,130

5 7-Jan-19 BUY 2,310 2,121

6 21-Oct-18 BUY 2,310 1,968

7 5-Oct-18 BUY 2,492 1,958

Analyst Coverage Universe

Sr. No. Company Name Rating TP (Rs) Share Price (Rs)

1 Axis Bank Accumulate 766 708

2 Bank of Baroda BUY 146 110

3 Bank of India Reduce 90 95

4 Federal Bank BUY 121 105

5 HDFC BUY 2,700 2,376

6 HDFC Bank BUY 2,700 2,484

7 HDFC Standard Life Insurance Company BUY 585 509

8 ICICI Bank BUY 484 416

9 ICICI Prudential Life Insurance Company BUY 511 383

10 IDFC First Bank BUY 55 45

11 IndusInd Bank BUY 1,800 1,510

12 Jammu & Kashmir Bank BUY 80 41

13 Kotak Mahindra Bank Hold 1,385 1,454

14 Max Financial Services BUY 695 413

15 Punjab National Bank Reduce 75 82

16 SBI Life Insurance Company BUY 906 776

17 South Indian Bank BUY 18 13

18 State Bank of India BUY 369 308

19 Union Bank of India Reduce 71 85

20 YES Bank Hold 101 98

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%

Accumulate : 5% to 15%

Hold : +5% to -5%

Reduce : -5% to -15%

Sell : < -15%

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

1166

1499

1833

2166

2500

Au

g -

16

Feb

- 1

7

Au

g -

17

Feb

- 1

8

Au

g -

18

Feb

- 1

9

Au

g -

19

(Rs)

HDFC Bank

August 12, 2019 14

ANALYST CERTIFICATION

(Indian Clients)

We/I, Ms. Pritesh Bumb- MBA, M.com, Mr. Prabal Gandhi- BTech, CFA Level II Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

(US Clients)

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report.

DISCLAIMER

Indian Clients

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This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

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