Q2FY20 RESULT UPDATE | BANKING AND FINANCIAL SERVICES HDFC …€¦ · and HDFC Securities Ltd. (ad-hoc based on FY19 earnings). We rate HDFC Bank’s 3mbanking business at 4x FY21E

INSTITUTIONAL

EQUITIES

IndiaNivesh Securities Limited Research Analyst SEBI Registration No. INH000000511 Please refer to important disclosure at the end

October 21, 2019

INSTITUTIONAL EQUITIES

Q2FY20 RESULT UPDATE | BANKING AND FINANCIAL SERVICES

HDFC Bank Corporate loans compensate for retail slowdown, core earnings healthy despite minor miss

HDFC Bank missed our NII estimate (-4%) despite a beat on business growth (+2.5%) as the NIM print was weaker (-10bps QoQ) due to excess liquidity (LCR 133%). The beat on other income was dominated by treasury profit, given the negative base, although fee traction stayed steady and healthy. Balance sheet momentum was robust, with corporate loans (+32%YoY) compensating for the sharp slowdown in retail loans (14.5%YoY). A continued and unrelenting focus on term deposits delivered a strong overall deposit growth rate (22.5%YoY). The management commentary, as usual, reflected business optimism, tempered only by obvious red herrings in selective retail and an acknowledgement of competitive intensity, while stating that the competition remained rational on pricing and growth. We retain the ‘BUY’ rating on HDFC Bank with a target price of Rs1,500 valuing the sector leader 4.2x FY21E ABV.

Auto slowdown affects retail growth, bounce back expected: Vehicle loans, comprising ~27% of the bank’s retail loan book, declined 1.5% YoY even as the non-vehicle retail segments registered ~19% YoY growth (Exhibit 3, pp.3), restricting the retail loan growth to 14% YoY (based on internal classification). The management expects a bounce in CV loans going forward. This was made up by corporate lending opportunities, which a) were spread across industries, b) had large but not necessarily chunky exposures, and c) included sectors like power, telecom, and NBFCs, with top-rated entities. For now, HDFC Bank has demonstrated that its growth momentum won’t be constrained by a slowdown in its retail segment.

Management not worried by marginal NIM weakness, balance sheet robustness at core of business strategy: The bank was ahead of its peers in raising TD rates and aggressively beginning to book term deposits starting Q4FY18. The strategy continued in Q2FY20 even as CASA ratio declined, although marginally, to 39.3% (down from the post-demonetisation peak of 48%). The bank is not worried about marginal/adverse NIM movements and continues to strong focus on liquidity. A strong LCR of 133% contributed to the overall NIM decline of 10bps QoQ. A softer LCR or 115% would not have affected NIM as much. Adjusted for this negative carry, NII was robust and in line.

Quality of incremental business good, indicators assuring stable asset quality: The bank’s observed asset quality indicators across geographies and income spectrums were showing improvement, and the quality of incremental growth was good and ‘well selected’. The NPA ratios improved with slippages trending lower than estimates. Overall, the commentary on asset quality is an assuring, especially in retail.

Valuation: Our target price includes Rs65/share value attributable to HDB Financial Services and HDFC Securities Ltd. (ad-hoc based on FY19 earnings). We rate HDFC Bank’s banking business at 4x FY21E P/ABV, taking the target price to Rs1,500. Maintain ‘BUY’.

Refer pp. 4 for conference call takeaways.

Financial summary Rs mn FY17 FY18 FY19 FY20E FY21E

Net interest income 331,392 400,949 482,432 560,424 661,472

Growth (%) 20.1 21.0 20.3 16.2 18.0

Net profit 145,496 174,867 210,781 264,452 337,910

Growth (%) 18.3 20.2 20.5 25.5 27.8

ROE (%) 17.9 17.9 16.5 16.5 18.2

ROA (%) 1.9 1.8 1.8 2.0 2.1

ABV (Rs) 171.0 201.4 269.5 304.9 356.6

EPS (Rs) 28.4 33.7 38.7 48.3 61.8

P/E (x) 43.3 36.5 31.8 25.4 19.9

P/ABV (x) 7.2 6.1 4.6 4.0 3.4

Source: Company, IndiaNivesh Institutional Research

STOCK INFO

BSE 500180

NSE HDFCBANK

Bloomberg HDFCB IN

Reuters HDBK.NS

Face Value (Rs) 1

Equity Capital (Rs mn) 5,470

Mkt Cap (Rs mn) 6,723,296

52wk High/Low 1,285 / 940

Avg Daily Vol (BSE+NSE) 8,940,948

SHAREHOLDING PATTERN (%)

Promoters 26.21

Public 73.79

(as on Sept, 2019)

PRICE PERFORMANCE

STOCK PERFORMANCE

3m 6m 12m HDFCB IN Equity 2.2 7.4 24.8

SENSEX 1.0 0.4 13.0

Source: Bloomberg, IndiaNivesh Institutional Research

Ravikant Bhat

+91 22 6240 6474

[email protected]

Prithvish Uppal

+91 22 6240 6453

[email protected]

BUY

CURRENT PRICE (INR)

1,229

UPSIDE/DOWNSIDE

▲21.2%

TARGET PRICE (INR)

1,500

PREVIOUS TARGET (INR)

1,300 (CMP as on 18 July 2019 closing)

HDFC Bank

2

Exhibit 1: Quarterly results (Rs mn) Y/E: Mar Q2FY20 Q2FY19 YoY (%) Q1FY20 QoQ (%) Q2FY20E Var. (%)

Interest income 281,663 241,996 16.4 273,916 2.8 285,040 (1.2)

Interest exp. 146,512 124,362 17.8 140,973 3.9 144,361 1.5

NII 135,150 117,634 14.9 132,943 1.7 140,679 (3.9)

Other income 55,887 40,156 39.2 49,703 12.4 47,905 16.7

- Fee income 40,545 32,956

35,516

42,182

- Forex income 5,517 4,198

5,767

4,723

- Trading profits 4,807 (328)

2,120

1,000

- Misc. income 5,018 3,330

6,300

0

Net income 191,038 157,790 21.1 182,645 4.6 182,878 4.5

Opex 74,057 62,991 17.6 71,173 4.1 74,103 (0.1)

-cost-income ratio 38.8 39.9

39.0

40.0

-Staff exp. 23,551 19,092 23.4 22,174 6.2 23,496 0.2

Op. profit 116,981 94,800 23.4 111,472 4.9 109,791 6.5

Provisions 27,007 18,200 48.4 26,137 3.3 22,475 20.2

- NPL prov. 21,044 15,725

24,135

17,811

PBT 89,974 76,600 17.5 85,336 5.4 87,886 2.4

Taxes 26,524 26,543 (0.1) 29,654 (10.6) 30,321

Tax rate (%) 29.5 34.7 - 34.8 - 34.5

PAT 63,450 50,057 26.8 55,682 14.0 60,034 5.7

Business Q2FY20 Q2FY19 YoY (%) Q1FY20 QoQ (%) Q2FY20E Var. (%)

Advances 8,969,838 7,508,381 19.5 8,297,298 8.1 8,763,759 2.4

- Retail 5,097,240 5,097,240

5,581,490

- Wholesale 3,603,503 2,185,890

2,466,889

- Overseas 269,095 225,251

248,919

Deposits 10,216,149 8,333,641 22.6 9,545,537 7.0 9,975,675 2.4

- CA 1,367,910 1,151,310

1,256,630

- SA 2,644,450 2,345,680

2,533,380

- CASA 4,012,360 3,496,990

3,790,010

- TDs 6,203,789 4,836,651

5,755,527

-CASA 39.3 42.0

39.7

-CD ratio 87.8 90.1 86.9

Earnings Q2FY20 Q2FY19 YoY (%) Q1FY20 QoQ (%) Q2FY20E Var. (%)

NIM (reported) 4.2 4.3

4.3

Cost-income ratio 38.8 39.9

39.0

RoE 16.3 16.4

14.6

RoA 2.0 1.8

1.8

EPS (Rs.) 23.2 18.4

20.4

Asset quality Q2FY20 Q2FY19 YoY (%) Q1FY20 QoQ (%) Q2FY20E Var. (%)

GNPAs (Rs mn) 125,082 100,977 23.9 117,690 6.3 127,328 (1.8)

GNPAs (%) 1.4 1.3

1.4

1.4

NNPAs (Rs mn) 37,910 30,282 25.2 35,672 6.3 37,155 2.0

NNPAs (%) 0.4 0.4

0.4

0.4

PCR 69.7 70.0

69.7

70.8

Slippages 37,140 32,840 13.1 36,618 1.4 37,894 (2.0)


HDFC Bank

3

Exhibit 2: Strong traction in term deposits continued, non-retail advances outpaced retail loan growth (Rs bn) Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 % QoQ % YoY Comp.

Business 12,942 13,302 14,471 15,144 15,842 16,335 17,425 17,843 19,186 7.5 21.1 -

Deposits

CA 978 1,013 1,193 1,093 1,151 1,119 1,425 1,257 1,368 8.9 18.8 0.0

SA 1,977 2,058 2,238 2,267 2,346 2,352 2,487 2,533 2,644 4.4 12.7 0.0

CASA 2,955 3,071 3,431 3,360 3,497 3,471 3,912 3,790 4,012 5.9 14.7 0.0

TDs 3,939 3,919 4,457 4,698 4,837 5,054 5,319 5,756 6,204 7.8 28.3 0.0

Total 6,893 6,990 7,888 8,058 8,334 8,525 9,231 9,546 10,216 7.0 22.6 0.0

Advances

Retail 4,132 4,329 4,584 4,800 5,097 5,319 5,475 5,581 5,809 4.1 14.0 64.8

Corporate loans 1,732 1,984 1,796 2,042 2,186 2,257 2,473 2,467 2,892 17.2 32.3 32.2

Total 6,049 6,312 6,583 7,086 7,508 7,810 8,194 8,297 8,970 8.1 19.5 97.0

CASA ratio (%) 42.9 43.9 43.5 41.7 42.0 40.7 42.4 39.7 39.3

CD ratio (%) 87.7 90.3 83.5 87.9 90.1 91.6 88.8 86.9 87.8


Exhibit 3: Vehicle loan traction was muted, home and unsecured personal loans were key drivers in retail loans

(Rs bn) Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 QoQ (%) YoY (%) Comp.

Vehicle loans 1,279 1,343 1,416 1,458 1,528 1,573 1,581 1,586 1,563 (1.5) 2.3 26.9

Auto loans 790 825 860 883 919 930 914 921 907 (1.5) (1.3) 15.6

CVCE 404 425 459 472 495 529 554 552 543 (1.7) 9.5 9.3

Two wheelers 85 92 96 103 113 114 113 113 112 (0.9) (0.5) 1.9

Non-vehicle retail loans 2,854 2,986 3,169 3,341 3,570 3,746 3,894 3,995 4,246 6.3 18.9 73.1

Business banking 965 1,008 1,095 1,096 1,170 1,204 1,250 1,261 1,366 8.3 16.7 23.5

Credit cards 308 336 361 388 405 448 466 495 520 5.1 28.4 9.0

Gold loans 53 53 54 55 57 58 58 59 61 2.7 6.8 1.0

Home loans 400 381 363 440 479 518 514 558 600 7.6 25.4 10.3

Kisan gold card 317 317 355 338 371 363 404 386 409 6.2 10.4 7.0

Loan against securities 32 35 39 36 36 35 36 34 33 (2.9) (9.2) 0.6

Personal loans 613 675 724 785 841 896 938 980 1,029 5.0 22.2 17.7

Other retail loans 165 181 178 204 210 224 228 223 228 2.3 8.6 3.9

Total loans 4,132 4,329 4,584 4,800 5,097 5,319 5,475 5,581 5,809 4.1 14.0 100.0

Retail loans / total loans (%) 68.3 68.6 69.6 67.7 67.9 68.1 66.8 67.3 64.8


Exhibit 4: Fee momentum was healthy, strong treasury profits vs. loss in Q2FY19 drove up overall other income

(Rs mn) Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 QoQ (%) YoY (%) Comp.

Core fees 26,140 28,721 33,297 31,710 32,956 36,468 36,921 35,516 40,545 14.2 23.0 72.5

FX income 3,840 4,262 4,164 4,996 4,198 3,977 4,033 5,767 5,517 (4.3) 31.4 9.9

Trading profits 3,559 2,594 220 (2,832) (328) 4,740 2,289 2,120 4,807 126.7 (1,565.5) 8.6

Miscellaneous income 2,520 3,115 4,605 4,307 3,330 4,025 5,469 6,300 5,018 (20.3) 50.7 9.0

Total fees 36,059 38,692 42,286 38,181 40,156 49,210 48,712 49,703 55,887 12.4 39.2 100.0

Fees / avg. assets (ann.) (%) 1.6 1.6 1.7 1.4 1.4 1.7 1.6 1.6 1.7


HDFC Bank

4

Exhibit 5: HDFCB has moved in a 1-yr forward PABV band of 3.2x-3.9x in trailing 2-years…


Exhibit 6: …and 1-year forward PE band of 20.4-26.7x in trailing 2-years


3.00

3.20

3.40

3.60

3.80

4.00

Oct

-17

Dec

-17

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

Dec

-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-1

9

Oct

-19

1-yr forward rolling P/BV

20.00

21.00

22.00

23.00

24.00

25.00

26.00

27.00

Oct

-17

Dec

-17

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

Dec

-18

Feb

-19

Ap

r-1

9

Jun

-19

Au

g-1

9

Oct

-19

1-yr forward rolling P/E

HDFC Bank

5

Conference call takeaways Growth opportunities – non retail portfolio: Seeing healthy pipeline in business

banking with rising penetration in semi-urban and rural channels, digital offerings complementing growth.

Disbursal growth in auto: Reasonably strong in Q2FY20, hoping the festival quarter would provide an even better impetus.

External benchmarking and home loans: Continue to have robust home loan originations, don’t see price being a disadvantage, and believe customers willing to pay a premium for the HDFC home loan product.

Growth opportunities – non retail portfolio: Corporate loan opportunities across industries, not dependent on chunky transactions, although bank did originate some large exposures, selective exposures taken to top rated entities in power, NBFC, and telecom.

Deposit growth / LCR / NIMs: Content with having excess liquidity, believe it is necessary, and okay if it results in temporary NIM weakness. LCR during Q2FY20 at 133% (vs. regulatory minimum of 100%) impacted NIMs (-10bps QoQ), NIMs would have been stable with a desired 115% LCR.

Fee growth: No one-offs in fees, monetised available gains in treasury to book strong trading profits (Rs4.1bn, refer Exhibit 1, pp. 2). Payments business, better than past yields in bancassurance contributed to the fee robustness.

Opex, branch additions: Shall continue to add branches / people even as digital rollout / penetration continues to get dense

Asset quality trends – unsecured portfolio: Delinquency levels in personal loan portfolio fairly stable, early indicators on newer portfolio (not to be read as new) measured months back, trending better, similar experience across other portfolios.

Asset quality trends – secured loans: Single largest component—auto loans—exhibit fairly stable early indicators, HDFCB trends far better than industry currently.

Asset quality trends – general indicators: Orientation towards origination from better income borrowers although bank extends finance across bureau bands, remain cautious about individual leverage, income, and stability of income.

Asset quality trends – 20F disclosures on auto loans: Spike in FY19 auto loan delinquency on account of a couple of problematic relationships, classified as NPAs, contributed to auto loan NPA spike to 1.43% from 90bps, but for this, auto loans were stable.

HDFC Bank

6

Income Statement (standalone)

(Rs mn) FY17 FY18 FY19 FY20E FY21E

Interest Earned 693,060 802,414 989,721 1,164,380 1,396,163

Interest Expended 361,667 401,465 507,288 603,955 734,691

Net Interest Income 331,392 400,949 482,432 560,424 661,472

Other Income 122,965 152,203 176,259 216,061 255,038

Net Income 454,357 553,152 658,691 776,485 916,510

Total Income 816,025 954,617 1,165,979 1,380,441 1,651,201

Total Expenses 132,197 158,846 183,576 208,587 254,485

Pre Provision Profit 257,324 326,248 397,497 472,477 560,085

Provisions 35,933 59,275 75,501 102,106 106,514

Profit before tax 221,391 266,973 321,996 370,371 453,571

Tax 75,894 92,106 111,215 105,919 115,661

Profit after tax 145,496 174,867 210,781 264,452 337,910


Balance Sheet (standalone)

(Rs mn) FY17 FY18 FY19 FY20E FY21E

Liabilities

Equity 5,125 5,190 5,447 5,471 5,471

Reserves and Surplus 889,498 1,057,760 1,486,617 1,703,272 1,990,151

Net Worth 894,624 1,062,950 1,492,063 1,708,743 1,995,621

Deposits 6,436,397 7,887,706 9,231,409 11,256,920 13,608,119

Borrowings 740,289 1,231,050 1,170,851 1,016,904 1,200,738

Other Liabilities & Provisions 567,093 457,637 551,083 582,539 647,059

Total Liabilities 8,638,402 10,639,343 12,445,407 14,565,105 17,451,537

Assets

Cash and Bank Balance 378,969 1,046,705 467,636 523,102 631,582

Money at Call and Short Notice 110,552 182,446 345,840 194,577 210,617

Investments 2,025,810 2,288,430 2,905,879 3,377,076 4,082,436

Advances 5,545,682 6,583,331 8,194,012 9,795,063 11,725,184

Fixed Assets 36,267 36,072 40,300 42,604 45,789

Other Assets 541,122 502,360 491,740 632,683 755,929

Total Assets 8,638,402 10,639,343 12,445,407 14,565,105 17,451,537


HDFC Bank

7

Key Ratios (standalone)

Y / E March FY17 FY18 FY19 FY20E FY21E

Earning Per Share (Rs) 28.4 33.7 38.7 48.3 61.8

Book Value Per Share (Rs) 174.6 204.8 273.9 312.3 364.8

Adj Book Value Per Share (Rs) 171.0 201.4 269.5 304.9 356.6

P/E (x) 43.3 36.5 31.8 25.4 19.9

P/BV (x) 7.0 6.0 4.5 3.9 3.4

P/ABV (x) 7.2 6.1 4.6 4.0 3.4

Balance Sheet Ratios (%)

CAR 14.6 14.8 17.1 17.3 16.1

Tier I 12.8 13.3 15.8 15.9 15.5

-CET1 12.8 12.3 14.9 15.2 14.9

Leverage (TA / Networth) 9.7 10.0 8.3 8.5 8.7

Credit/Deposit 86.2 83.5 88.8 87.0 86.2

CASA 45.8 45.5 42.1 40.7 39.3

Growth Y-o-Y (%)

Net Advances 19.4 18.7 24.5 19.5 19.7

Deposits 17.8 22.5 17.0 21.9 20.9

Business 18.5 20.8 20.4 21.4 20.3

Net Interest Income 20.1 21.0 20.3 16.2 18.0

Other Income 14.4 23.8 15.8 22.6 18.0

Net Profit 18.3 20.2 20.5 25.5 27.8

Return Ratios (%)

ROA 1.9 1.8 1.8 2.0 2.1

ROE 17.9 17.9 16.5 16.5 18.2

RoRWA 2.5 2.4 2.4 2.6 2.9

Yield / Margin (%)

Yield on Funds 8.8 8.3 8.6 8.6 8.7

Cost of Funds 4.6 4.2 4.4 4.5 4.6

Interest Spread 4.2 4.2 4.2 4.1 4.1

Core spreads 4.9 5.8 5.5 5.3 5.2

Net Interest Margin 4.8 4.8 4.7 4.5 4.5

Cost / Income 43.4 41.0 39.7 39.2 38.9

Other Ratios (%)

Gross NPA 1.1 1.3 1.4 1.4 1.4

Net NPA 0.3 0.3 0.3 0.4 0.4

PCR 68.7 79.3 78.4 70.5 72.4


RoA Tree (standalone) (%) FY17 FY18 FY19 FY20E FY21E

Interest Earned 8.8 8.3 8.6 8.6 8.7

Interest Expended 4.6 4.2 4.4 4.5 4.6

Net Interest Income 4.2 4.2 4.2 4.1 4.1

Other Income 1.6 1.6 1.5 1.6 1.6

Net Income 5.8 5.7 5.7 5.7 5.7

Total Income 10.4 9.9 10.1 10.2 10.3

Total Expenses 2.5 2.4 2.3 2.3 2.2

Pre Provision Profit 3.3 3.4 3.4 3.5 3.5

Provisions 0.5 0.6 0.7 0.8 0.7

Profit before tax 2.8 2.8 2.8 2.7 2.8

Tax 1.0 1.0 1.0 0.8 0.7

Profit after tax 1.9 1.8 1.8 2.0 2.1


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Other definitions

NR = Not Rated. The investment rating and target price, if any, have been arrived at due to certain circumstances not in control of INSL. The information is not meaningful to arrive at a rating as per our definition above and is therefore excluded.

CS = Coverage Suspended. INSL has suspended coverage of this company.

UR=Under Review. Such e invest review happens when any developments have already occurred or likely to occur in target company & INSL analyst is waiting for some more information to draw conclusion on rating/target.

Research Analyst has not served as an officer, director or employee of Subject Company

One year Price history of the daily closing price of the securities covered in this note is available at www.nseindia.com and www.economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose name of company in the list browse companies and select 1 year in icon YTD in the price chart)

IndiaNivesh Securities Limited

Research Analyst SEBI Registration No. INH000000511

Corporate Office: Lodha Supremus, 17th Floor, Senapati Bapat Marg, Lower Parel (West), Mumbai - 400 013.

Registered Office: 601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai - 400 007.

Tel (Board): 022 6240 6240 | Fax: 022 6240 6241

e-mail: [email protected] | Website: www.indianivesh.in

Market Cap Rating

mailto:[email protected]

Documents

Q2FY20 RESULT UPDATE | BANKING AND FINANCIAL SERVICES HDFC …€¦ · and HDFC Securities Ltd. (ad-hoc based on FY19 earnings). We rate HDFC Bank’s 3mbanking business at 4x FY21E