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BANKING HDFC Bank
Innate resilience; enduring growth… Initiating Coverage
Analyst: Strong, consistent and resilient private banking player: HDFC Rating Accumulate
Anand Dama Target Price Rs1940
anand.dama@networthdirect.com
bank is one of the best banking franchises among Indian banks
91 22 3028 6391 with an unparalleled liability network, strong & consistent CMP Rs1713
th
Date: 8 January, 2010 financial performance and sound risk management systems in Upside 13%
place resulting in best asset quality even during trying times. Sensex 17,189
Growth set to return, but with quality: We estimate bank to
deliver better than system credit expansion at about 24%
CAGR over FY09‐12E, well supported by improving economic Key Data
conditions and sufficient low cost funds to generate better Bloomberg Code HDFCB IN
margins at lower risk. We believe that the banks revived Reuters Code HDBK.BO
growth phase will also be qualitative, bringing in more NSE Code HDFCBANK
stability, comfort and resilience during tough times. Current Share o/s (mn) 429.0
Impeccable asset quality with one of the lowest stressed MktCap (Rsbn/USDmn) 734.9/16089.8
assets: HDFC Bank has maintained robust asset quality with 52 Wk H/L (Rs) 1839/774
one of the lowest stressed assets amongst peers at about Daily Vol.(3M NSE Avg) 0.8mn
2.3%, including GNPA at about 1.8%, despite higher retail Face Value (Rs) 10
exposure and economic slowdown, primarily due to its Beta 0.99
prudent lending practices and conservative provisioning 1USD/INR 46.7
policies (provision coverage at above 70%).
FY09 74,212 42.0 107,118 42.6 22,450 41.2 52.8 329.6 16.1 1.3 32.5 5.2
FY10E 83,479 12.5 124,142 15.9 29,441 31.1 64.7 457.4 16.1 1.5 26.5 3.7
FY11E 101,432 21.5 123,313 17.9 38,155 29.6 83.8 524.8 16.5 1.6 20.4 3.3
FY12E 126,199 24.4 141,916 20.8 48,629 27.5 106.8 618.4 18.1 1.7 16.0 2.8
Source: Company, Networth Research
HDFC Bank 2
Investment Rationale
Strong, consistent and resilient private banking player
HDFC bank is one of the best banking franchises among Indian banks with an unparalleled liability
network, strong & consistent financial performance and sound risk management systems in place
resulting in best asset quality even during the trying times. Bank characterises a combination of
private aggression with a positive flavor of PSU (strong liability franchise and conservatism). Since
inception, bank has adopted liability driven growth strategy with clear focus on margins,
profitability and sound asset quality. During the recent sub‐prime crisis, when many banks were
affected, HDFC bank remained a safe harbor as it had virtually no exposure to these toxic assets
nor any material international exposure.
The bank has consistently outperformed the broad industry with 52% asset CAGR, 61% credit
growth and delivering average PAT growth of 40% and RoE of 20% over past 10 years. Bank has
gained significant market share in industry credit and CASA deposits, which is a mainstay for the
banks sector‐beating margins (>4%). To gain scale and emerge as a stronger private banking
player, bank has even adopted in‐organic growth strategy acquiring two banks (Times bank and
CBoP) through its journey till now. Going‐forward, we estimate earnings trajectory to remain
strong and consistent with 29% PAT CAGR, RoE at 18% and RoA at 1.7% over FY09‐12E. We believe
that banks such as HDFC bank with strong low‐cost liability franchise, robust but qualitative growth
oriented bank will emerge as sustainable winners in long run.
Exhibit 4: Consistent PAT growth above 30% Exhibit 5: Better RoE vis‐à‐vis industry
% %
100 30
80 25
60
20
40
15
20
10
0
5
‐20
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
0
HDFCB (adj for merger) HDFCB FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Private PSU
SCB HDFC Private PSU SCB
Source: Company, RBI, Networth Research Source: Company, RBI, Networth Research
Exhibit 6: Credit growth well above industry (YoY) Exhibit 7: Gained market share even in tougher times
% %
160 6 30
140 5 25
120
4 20
100
80 3 15
60
2 10
40
1 5
20
0 0 0
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
‐20
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Q2FY10 Share in industry credit Share in industry CASA
Share in pvt banks credit Share in pvt banks CASA
HDFC (adj for merger) HDFCB Private SCB
HDFC Bank 3
Out‐performance during recent quarters also indicates banks inherent strength and
strong resilience
Despite economic slowdown, HDFC Bank registered consistent ~30% PAT growth, maintaining its
sector‐beating margins above 4% and sound asset quality, courtesy its inherent strength and
resilience. Recent quarterly performance indicates that bank is back in growth phase,
outperforming industry. We believe that the bank’s strategy to maintain strong but consistent
performance is the key to the banks success, justifying its premium valuation and making it a bell‐
weather bank.
Exhibit 8: Smart post merger recovery evident
%
60 4.6
4.5
50
4.4
40 4.3
4.2
30
4.1
20 4.0
3.9
10
3.8
0 3.7
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Loan growth (YoY) PAT growth (YoY) NIM
Source: Company, Networth Research
Resilient investment book
HDFC Bank does not have any international investment book and hence remains relatively better
insulated to global turbulence as compared to its peers. Further, it has a reasonably lower
proportion of book in to AFS category (at about 25%), which in a way secures the bank from any
significant adverse moment in G‐Sec yields, but at the same time restricts higher trading gains in
case of declining yields scenario.
CBoP merger pain waning…
As a strategic decision to enhance branch network (which otherwise would have taken at‐least 2‐
3 years through organic expansion) and gain business scale, bank acquired retail focused
Centurion bank of Punjab (CBoP) at a relatively higher cost. Though merger gave bank a needed
scale, but adversely impacted banks financials and to make it worst followed by global slowdown
due to sub‐prime crisis. The merger brought with it elevated cost structure, high‐risk loans and
under‐productive though potential, branch network and biggest challenge in form of integration
process. However, bank has timely completed the integration process backed by strong
management band‐width and hands‐on experience and merger benefits are already evident well
ahead of expectation supported by economic recovery. Approximately 40% of the GNPA’s as on
during FY09, were contributed by CBoP. However, erstwhile CBoP’s high‐risk loan portfolio has
almost run‐off except for personal loans, which will take another 12‐15 months and thus do not
pose significant risk anymore. We expect the full benefits of the merger to flow in, leading to
improved financial ratios and better valuations for the bank.
HDFC Bank 4
HDFC Bank scores well on most of the parameters…
We believe the key positives of HDFC bank are its strong liability franchise with higher CASA
deposits leading to sector beating NIM’s, strong fee income, consistent financial performance
with impeccable asset quality, strong & dynamic management and parental support from HDFC.
As indicated in below table, HDFC bank scores well on most of the parameters and has emerged
as a consistent and seasoned private banking player over the years, justifying the premium it
commands.
Exhibit 9: Key business and financial summary of peer banks
Comparative Parameters HDFC Axis ICICI Commentary
Business Metrics (%)
Branches (Q2FY10) 1506 916 1520 Plans to add about 200‐250 branches every year
Asset (3 yr CAGR) 36.0 44.0 15.0 Phenomenal growth but with quality. We estimate credit growth at 24%
Credit growth (3 yr CAGR) 41.0 54.0 14.0 on high base over FY09‐12E.
Margins (%)
NIM ‐ FY09 4.5 3.0 2.3
NIM ‐ Q2FY10 4.2 3.5 2.5
HDFC bank commands sector beating margins owing to strong low‐cost
Yield on advances 13.6 10.6 10.1 franchise to fund higher yielding assets. Despite slowdown, banks NIM's
Cost of deposits 6.0 6.1 6.8 remained nearly stable. We expect NIM's to remain range bound at
about 4.4‐4.5% over FY09‐12E
Interest spread 7.6 4.5 3.3
NII/Assets 4.3 2.9 2.1
Asset quality (%)
GNPA (Q2FY10) 1.8 1.2 4.7
Best asset quality with one of the lowest stressed assets.
Stressed Assets (Q2FY10) 2.4 4.1 7.2
Provision coverage (exc. Tech w/offs) 70.0 63.0 51.1 Provision coverage well within RBI's prescribed levels
Capital Market exposure 4.4 2.8 2.9
Commercial Real estate exposure 7.2 6.5 7.5
Qualitative asset profile leading to lower NPA's and capital requirement.
High‐risk industry exposure 7.5 18.1 22.1
RWA/Total Assets 71.0 74.0 94.0
Profitability (%)
RoE 16.1 19.1 7.8 RoEs to improve further, but to remain below historical averages. RoA
RoA 1.3 1.4 1.0 set to improve with improving NII/Assets and fee income
Source: Networth Research
Note: Primarily FY09 figures; but used Q2FY10 numbers as well wherever available and relevant
HDFC Bank 5
Growth set to return, but with quality
After adopting go‐slow strategy considering economic slowdown and expensive CBoP
acquisition, bank is gearing up to get back on growth path, which is evident during past 2
quarters. Bank has registered about 11%YoY and 10%QoQ growth during Q2FY10, after negative
sequential growth in Q3FY09 and flat growth in Q4F09. The growth has come despite run‐off on
CBoP portfolio, primarily driven by corporate (35% in 1HFY10) and car loans (10% in 1HFY10).
As a strategy, bank will continue to focus on corporate loan growth, but with macro‐ economic
risks retreating, bank is also likely to register significant revival in retail loan growth. Systemic
demand for retail loans (especially auto and housing loans) has improved. HDFC bank has been a
dominant player in auto financing with more than 30% market share amongst banks and with
auto sales reviving, bank is likely to register better growth in this segment. We estimate bank to
register better than system credit expansion at about 24% CAGR over FY09‐12E, well supported
by improving economic conditions and sufficient low cost funds to fund higher credit growth at
better margins. The bank is still not looking aggressively at building international loan book,
which should further insulate bank from any near term shocks in international markets.
Exhibit 10: QoQ loan growth reviving Exhibit 11: Better loan growth v/s peers & industry(1HFY10)
% %
25 20
22.3
15.0
15
20
10
15 5.5
4.3
5
9.5
10
0
5.6 5.0 ‐0.6 ‐1.4
5 ‐5
0.1
0 ‐10
‐15 ‐12.6
‐5 ‐3.4
HDFC ICICI Axis SBI SCB Pvt
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10
Source: Company, Networth Research Source: Company, Networth Research
Loan mix tilting towards corporate, secured and high duration assets…
Traditionally bank has been a preferred working capital financier rather than long term financier
and leveraging upon the same during downturn, bank has consciously build up its relatively low
risk corporate loan book. Bank has indicated that it will like to further explore opportunities in
mid to long term infrastructure financing, which would increase the duration of its loan portolio,
subject to appropriate pricing. Within retail portfolio also bank has consciously allowed high risk
2W and LAS portfolio to run‐off and has kept its CV, personal loan, business banking and credit
card portfolio nearly stable. As per management, CBoP’s high risk 2W portfolio has virtually run‐
off, while personal loan portfolio would take another 12‐15 months.
Bank has been retaining home loans originated by it for HDFC limited (in contrast to earlier
practice of transferring the loans to HDFC), along with acquired home loan portfolio from
erstwhile CBoP, which should make the retail portfolio more secured, help fulfill its priority sector
lending target and also improve the duration of the portfolio. We believe that banks revived
growth phase will also be qualitative, bringing in more stability, comfort and resilience during
tough times.
HDFC Bank 6
Exhibit 12: Loan composition shifting towards corporates
100%
80%
60%
40%
0%
Q4FY08 Q1FY09 Q4FY09 Q1FY10 Q2FY10
Corporate PV CV
2W Personal Credit Card
LAS Business banking Housing & others
Source: Company, Networth Research
Impeccable asset quality with one of the lowest stressed assets
HDFC Bank has maintained robust asset quality despite higher retail exposure and economic
slowdown, primarily due to its prudent lending practices and conservative provisioning policies.
Considering stressful economic environment, higher share of retail book, high‐risk loan portfolio
(2W’s and personal loans) acquired from CBoP, serious concerns were raised about banks asset
quality. However sensing the stress, the bank consciously allowed CBoP high risk loan portfolio to
run off and also somber down its credit growth machine to arrest incremental NPL’s. Bank has
once again emerged as one of the best bank in terms of asset quality with one of the lowest
stressed assets in Indian banking industry.
GNPAs declined 6%QoQ during Q2FY10 to 1.8%, indicating likely peaking of delinquencies in near
term. Further, overall stressed assets including restructured assets stood at about 2.3%, which is
one of the lowest in the industry. However, factoring in higher retail portfolio including CBoP
portfolio, we conservatively estimate GNPA at about 1.9% and NNPA at 0.5% by FY12E.
Exhibit 13: Asset quality risks nearly peaked Exhibit 14: Lowest stressed assets amongst peers (Q2FY10)
(%)
2.5 %
2.1 2.1 2.1 9
2.0 1.9
2.0 1.9 8
1.8
1.5
1.6 7
1.5 1.3 1.3 6
5
1.0 4
3
0.5
2
1
0.0
0
FY10E
FY11E
FY12E
FY07
FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Source: Company, Networth Research Source: Company, Networth Research
HDFC Bank 7
Higher provision coverage comforting
HDFC Bank has traditionally maintained a NPA coverage ratio above 67% (well above 100%
including general provisions) driven by consistently higher operating profitability (higher
operating income/average assets at about 3%). We estimate operating profits to grow at 23%
CAGR over FY09‐12E, providing enough cushion for higher NPA provisioning, if required. We
expect NPA coverage to be in the range of about 74‐76%, which is well above RBI’s prescribed
level of 70%, keeping its net NPA well below 1% over FY09‐12E.
Exhibit 15: Adequate provision coverage above 70%
%
95 91.7
90 86.2
83.8
85
80 75.8 76.1
74.5
75 69.5 69.2 68.6
67.1
70
65
60
55
50
FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E
Source: Company, Networth Research
One of the best liability franchises and further building muscle
HDFC bank has one of the best liability franchises with more than 70% of branches located in the
CASA rich metro and urban regions of the country. Traditionally, bank had strong presence in
North, West and southern region, which has been further amplified with acquisition of CBoP.
Most of the banks have realised importance of maintaining adequate branch network, which
helps in procuring low cost CASA deposits and thus control cost of funding in long run to maintain
margins. HDFC bank has been aggressive on this front since its inception and has even acquired
banks to bolster its branch network. Historically, bank has maintained higher CASA ratio in the
range of about 40%‐55%, which provides the flexibility to lend at competitive rates to customers
and still maintain one of the best margins in the industry.
Exhibit 16: Well spread CASA rich branch network Exhibit. 17: HDFC Bank has higher share of metro+urban branches
100% 5% 4%
10% 6%
90%
Central 23% 24%
80%
East 10% North 33%
70% 53%
9% 30%
60%
34%
50% 40%
28%
40%
30% 25%
West
20% 39%
25% 29% 32%
South 10% 16%
26% 0%
ICICI Bank HDFC Bank Axis Bank Federal Bank
Metro Urban Semi‐urban Rural
Source: Company, Networth Research Source: Company, Networth Research
HDFC Bank 8
Branch expansion back on track after a lull
Post merger, bank had consciously slowed down branch expansion for about 3 quarters till
Q1FY10. However, off‐late with integration process of CBoP branches over and economy back on
track, bank has revived its organic branch expansion plan opening about 90 branches in Q2FY10.
It plans to open about 200‐250 branches every year, majority of which will be stripped down
version of branches.
Exhibit 18: Bank to add about 200‐250 branches every year
Nos
2500
2000
1500
0
FY07 FY08 FY09 Q2FY10 FY10E FY11E FY12E
Source: Company, Networth Research
Superlative CASA ratio in the industry…
Bank has one of the best CASA ratio in the industry at about 50% with higher share of stable
savings deposits and retail deposits. Higher savings deposits has been due to banks wide‐spread
branch network and its focus on corporate salary a/cs. Post merger with CBoP and owing to
industry‐wide phenomenon of cannibalization of savings accounts due to increased rate
differential between savings and term deposits, banks CASA ratio had fallen to about 40% during
Q3FY09 from a high of 54% pre‐merger. However, with falling term deposit rates, integration of
erstwhile CBOP branches and continued branch expansion supported by float arising from
improved transactional banking and IPO’s, CASA ratio has already started shown signs of
improvement to about 50% in Q2FY10 (Core CASA ratio – 47%). We believe that significant branch
expansion, reducing spread between term and saving deposit rates and incremental CASA from
well‐integrated CBoP branches should help bank maintain CASA ratio in the range of about 50%
and thus sustain its sector‐beating margins (>4%).
Exhibit 19: One of the highest CASA ratio with higher share of savings deposits
60% 22%
19%
50% 17%
16%
13%
40% 21% 12%
19% 8%
30% 12% 7%
29% 30%
20% 25% 24% 2%
‐2%
10% ‐3%
0% ‐8%
HDFC ICICI Axis PNB
Savings Current CASA mobilisation during 1HFY10
Source: Company, Networth Research
HDFC Bank 9
…helped maintain best in class margins above 4% despite industry‐wide pressure
HDFC Bank commands best in class NIM’s in the banking industry (only after Kotak Mahindra
Bank), primarily on account of lower cost of funds (led by higher CASA) and better yields (higher
retail exposure). NIM’s were under pressure owing to falling interest rates and higher cost of
funds since the onset of slowdown. However, HDFC Bank managed to maintain its margin at
about 4.2% during past 3 quarters with marginal compression courtesy its astounding ability to
control cost of funds. Going forward, with credit growth back on track including revival in retail
loans and improvement in CASA ratio, we expect banks NIM to settle around 4.5%.
Exhibit 20: NIM’s to settle around 4.5% Exhibit 21: NIM’s sustained despite industry‐wide pressure
(%) (%)
5.0 4.6
4.9
4.9 4.2
4.8
3.8
4.7
4.6 3.4
4.5
4.5 4.5 4.5
4.4 3.0
4.4
4.4
2.6
4.3
2.2
4.2
Q3FY09 Q4FY09 Q1FY10 Q2FY10
4.1
FY07 FY08 FY09 FY10E FY11E FY12E HDFC ICICI Axis SBI PNB
Source: Company, Networth Research Source: Company, Networth Research
Strong, non‐volatile and well‐diversified source of non‐interest income
Non‐interest income contribution to net income for HDFC bank has been lower as compared to its
peers at about ~30%, but is relatively strong and less volatile with non‐trading income
contributing about 88% of other income. Core fee income excluding forex & derivative gains
contributes about 75% of the non‐interest income, of which nearly 75% is from retail operations.
The bank has well diversified fee‐based product portfolio for both retail (viz loan processing,
credit card, depository, third party and other fee based products) and corporate clients (viz core
banking, trade finance, CMS), which endows stability and sustainability to its fee income.
Exhibit 22: Non‐interest income less volatile with higher share of non‐trading income
100%
80%
60%
40%
20%
0%
-20%
FY05 FY06 FY07 FY08 FY09 1HFY10 FY10 FY11E FY12E
HDFC Bank 10
Bank has identified improving fee income as one of the key focus area and is taking various
measures to enhance the same. CBoP’s acquisition (strong in fee‐based third party product
distribution, remittance, forex & derivative business) was one such strategic move to enrich its
fee‐based product basket, increase its reach and customer base. As a result, share of forex &
derivative income has significantly improved in banks non‐interest income. Bank has strong
presence in retail segment; however, off‐late share of corporate loans too has increased in bank’s
loan portfolio, indicating increased activity on corporate side, which should further boost banks
fee income. During 1HFY10, non‐interest income growth has been robust, driven by higher
treasury and fee income. With rising bond yields, treasury income outlook remains weak during
2HFY10, however, fee income growth is likely to remain robust with management expecting it to
track loan growth. We expect bank’s non‐interest income to register 15% CAGR over FY09‐12E,
with core‐fee income at 17% CAGR.
Exhibit 23: Fee income to trail loan growth
%
80 100
70 90
80
60
70
50 60
40 50
30 40
30
20
20
10 10
0 0
FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Non-interest income growth Fee income Loan growth
Source: Company, Networth Research
Cost‐income ratio improves with synergies kicking‐in
Post CBoP merger, HDFC banks (merged) cost‐income ratio had increased to about 56% owing to
high‐cost operating structure of CBoP and integration related expenses, which has now come‐off
with synergies kicking‐in. Bank has managed to control the C‐I ratio well ahead of expectation, led
by significant improvement in overall productivity, better treasury gains and pick‐up in fee income
from CBoP branches, which had been badly affected post merger. With integration nearly over,
expenses are expected to be under control and with merger benefit sinking in, we believe that
there is further scope, though not significant for improvement in C‐I ratio to about 45% by FY12E.
Exhibit 24: Post merger cost‐efficiency showing definitive signs of improvement
%
60 55.7 55.3
50.3 50.0
47.1 47.6 46.2 46.2
50 45.2 45.1
40
30
20
10
0
FY10E
FY11E
FY12E
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Source: Company, Networth Research
HDFC Bank 11
Better earnings visibility emerging; however RoE’s to remain below historical averages
Bank had consciously slowed down the pace of loan growth resulting in relatively moderate core
earnings. However, with economy well on revival and dampening impact of CBoP merger
retreating, credit and earnings growth momentum has recently picked up. We expect the bank to
deliver strong and consistent 29% PAT CAGR over FY09‐12E, on the back of steady NIM’s, better
fee income and asset quality.
Bank has registered average RoE of about 20% over past 10 years, which has come down to about
16%, primarily impacted due to significant equity dilution post merger. However, going forward,
we estimate RoE to improve to about 18% by FY12E, as bank gets back to high growth phase and
productively deploys the infused capital. We expect better NII growth and higher fee income
contribution to overall income to improve leading to better RoA at about 1.7% by FY12E.
Exhibit 25: Return ratios likely to improve but remain below historical average
%
25 2.0
1.6 1.7
1.5
20 1.4 1.4 1.6
1.3
15 1.2
10 19.5 0.8
17.7 16.5 18.1
16.1 16.1
5 0.4
0 0.0
FY07 FY08 FY09 FY10E FY11E FY12E
RoE-LHS RoA-RHS
Source: Company, Networth Research
Warrant conversion further enhances capital adequacy
Bank has decent capital adequacy at about 15.7%, including Tier‐I capital at about 10.9% during
Q2FY10. Parent ‐ HDFC has subscribed to 26.2mn warrants (at issue price of Rs1530), which bank
had issued to HDFC post CBoP merger to retain latter’s holding in the bank. Concerns were raised
about subscription of these warrants as the stock price of HDFC bank had declined well below
issue price, however, the same has been put to rest with market recovery and continued support
from parent, which is also a major comforting factor for the bank. Warrant conversion led to
more than 200bps increase in Tier I capital and is book value accretive as it enhanced book value
by Rs87.5 i.e 23% against equity dilution of mere 6%. We estimate overall CAR at comfortable
level of about 15.6%, with Tier‐I capital at about 11.6% by FY12E without further capital infusion.
HDFC Bank 12
Valuation Analysis
Rich valuations to stay; recommend accumulate
Over the years, bank has build strong asset and liability base with sound business practices, which
has helped it sail through double hit of expensive merger and economic slowdown. Bank
commands premium valuation primarily due to its consistent earnings growth of above 30%,
sector‐leading NIMs (>4%), robust asset quality, sound management and all‐in‐all its ability to
emerge as a strong and resilient private banking player. With profitable and qualitative growth
well set to return and merger benefits sinking in, we believe that bank would continue to enjoy
premium valuations.
The stock is currently richly valued at 20.4x EPS and 3.3x FY11E adjusted BV. It has primarily been
trading in the one year forward P/Adj BV range of 2‐4x with max P/Adj BV of 5.5x and min of 1.8x
in past 10 years with a significant premium over sector. We value HDFC Bank assigning a P/adj BV
of 3.7x on FY11E adj. BV of Rs525 to arrive at a value of Rs1940, providing an upside of 13% from
current levels. Hence recommend accumulate on the stock.
Exhibit 26: One year forward P/Adj BV
Rs Index
2600 26000
2400 24000
2200 22000
2000 20000
1800 18000
1600 16000
1400 14000
1200 12000
1000 10000
800 8000
600 6000
400 4000
200 2000
0 0
18‐Aug‐02
12‐Oct‐03
29‐Feb‐04
18‐Jul‐04
05‐Dec‐04
24‐Apr‐05
11‐Sep‐05
18‐Jun‐06
05‐Nov‐06
12‐Aug‐07
30‐Dec‐07
05‐Oct‐08
22‐Feb‐09
12‐Jul‐09
29‐Nov‐09
31‐Mar‐02
05‐Jan‐03
25‐May‐03
29‐Jan‐06
25‐Mar‐07
18‐May‐08
2.5 6.0
2.0 5.0
1.5 4.0
3.0
1.0
2.0
0.5
1.0
0.0
0.0
1‐Apr‐05
1‐Aug‐05
1‐Dec‐05
1‐Apr‐06
1‐Aug‐06
1‐Dec‐06
1‐Apr‐07
1‐Aug‐07
1‐Dec‐07
1‐Apr‐08
1‐Aug‐08
1‐Dec‐08
1‐Apr‐09
1‐Aug‐09
‐0.5
Apr‐05
Aug‐05
Dec‐05
Apr‐06
Aug‐06
Dec‐06
Apr‐07
Aug‐07
Dec‐07
Apr‐08
Aug‐08
Dec‐08
Apr‐09
Aug‐09
Source: Bloomberg, Networth Research Source: Bloomberg, Networth Research
HDFC Bank 13
Under‐performed broad indices and peers, but to recover
Stock has underperformed the broad indices and its peers since Mar 09 market recovery, due to
concern on banks growth and asset quality. However, with growth coming back to fore, asset
quality stabilising and earnings gaining traction leading to improvement in its RoE, we believe
that bank should perform better.
Exhibit 29: Under‐performed its peers since Mar 09 recovery Exhibit 30: Under‐performed broad indices
(%) (%)
350 360
300 320
280
250
240
200
200
150 160
100 120
50 80
0 40
8‐Apr‐09
17‐Apr‐09
26‐Apr‐09
1‐Jun‐09
10‐Jun‐09
19‐Jun‐09
28‐Jun‐09
7‐Jul‐09
16‐Jul‐09
25‐Jul‐09
3‐Aug‐09
30‐Aug‐09
12‐Aug‐09
8‐Sep‐09
21‐Aug‐09
17‐Sep‐09
26‐Sep‐09
5‐Oct‐09
14‐Oct‐09
23‐Oct‐09
1‐Nov‐09
10‐Nov‐09
19‐Nov‐09
28‐Nov‐09
7‐Dec‐09
16‐Dec‐09
25‐Dec‐09
3‐Mar‐09
12‐Mar‐09
21‐Mar‐09
30‐Mar‐09
5‐May‐09
14‐May‐09
23‐May‐09
3‐Jan‐10
8‐Apr‐09
17‐Apr‐09
26‐Apr‐09
1‐Jun‐09
10‐Jun‐09
19‐Jun‐09
28‐Jun‐09
7‐Jul‐09
16‐Jul‐09
25‐Jul‐09
3‐Aug‐09
12‐Aug‐09
21‐Aug‐09
30‐Aug‐09
8‐Sep‐09
17‐Sep‐09
26‐Sep‐09
5‐Oct‐09
14‐Oct‐09
23‐Oct‐09
1‐Nov‐09
10‐Nov‐09
19‐Nov‐09
28‐Nov‐09
7‐Dec‐09
3‐Mar‐09
12‐Mar‐09
21‐Mar‐09
30‐Mar‐09
5‐May‐09
14‐May‐09
23‐May‐09
Source: Bloomberg, Networth Research Source: Bloomberg, Networth Research
Key risks and concerns
Higher delinquencies: Though retail NPA’s have nearly peaked, corporate NPA’s could still
bring in pain. Further overall systemic risk still remains though moderated, posing risk to its
overall loan portfolio and thus higher delinquencies.
Slowdown in branch expansion: Bank has unveiled significant branch expansion plan, which if
scaled down or not timely executed could affect CASA & business growth assumptions.
Retracement of fiscal stimuli: Government has taken various fiscal measures, which has
helped speedy economic recovery, including supporting credit growth and in particular
automobile segment. However, fiscal stimulus is likely to be retraced sooner, which could
affect recovery process and overall credit growth of banking industry.
HDFC Bank 14
Financial Summary
Income Statement (Rs.mn) Ratios
Y/E March FY08 FY09 FY10E FY11E FY12E Y/E March FY08 FY09 FY10E FY11E FY12E
Interest Earned 101,150 163,323 169,202 199,863 248,131 Bal Sheet Ratios (%)
Interest Expended 48,871 89,111 85,723 98,431 121,932 Loans/Deposits 62.9 69.2 75.4 75.4 75.4
Net Interest Income 52,279 74,212 83,479 101,432 126,199 CASA Ratio 54.5 44.4 50.5 50.0 50.0
Growth (%) 50.7 42.0 12.5 21.5 24.4 Loan Growth 35.1 24.2 22.5 25.0 25.0
Non Interest Income 22,832 32,906 40,663 44,956 50,667 Deposit Growth 47.5 16.5 12.5 25.0 25.0
Growth (%) 50.6 44.1 23.6 10.6 12.7 Operating Ratios (%)
Fee, forex and other inc 21,191 29,081 34,663 40,456 46,167 NIM 4.9 4.5 4.4 4.5 4.5
Net Income 75,110 107,118 124,142 146,388 176,866 Non‐int inc/Net inc 30.4 30.7 32.8 30.7 28.6
Growth (%) 50.7 42.6 15.9 17.9 20.8 Empl Costs/ Op Costs 34.7 40.5 41.0 41.1 41.7
Operating Expenses 37,456 55,328 57,390 66,116 79,822 Cost/Income 49.9 51.7 46.2 45.2 45.1
Growth (%) 54.7 47.7 3.7 15.2 20.7 Operating cost growth 54.7 47.7 3.7 15.2 20.7
Employee expenses 13,014 22,382 23,519 27,181 33,250 Total prov/avg. loans 1.9 1.8 2.1 1.7 1.4
Other expenses 24,443 32,946 33,871 38,935 46,572 Asset Quality Ratios (%)
Pre‐Prov Profits 37,654 51,790 66,752 80,271 97,044 Gross NPA 1.3 2.0 2.1 2.1 1.9
Prov & Contingencies 14,843 18,797 24,084 24,974 26,053 Net NPA 0.5 0.6 0.5 0.5 0.5
Loan loss provisions 10,264 16,058 23,351 23,079 24,031 Slippage 1.9 3.5 1.9 1.6 1.3
PBT 22,811 32,993 42,668 55,297 70,991 NPL coverage ratio 67.1 68.6 75.8 74.5 76.1
Provision for taxes 6,909 10,543 13,227 17,142 22,362 Capital Ad. Ratios (%)
PAT 15,902 22,450 29,441 38,155 48,629 Total CAR 13.6 15.7 17.4 16.4 15.6
Growth (%) 39.3 41.2 31.1 29.6 27.5 Tier 1 CAR 10.3 10.6 12.7 12.0 11.6
Profitability Ratios (%)
RoAE 17.7 16.1 16.1 16.5 18.1
RoAA 1.4 1.3 1.5 1.6 1.7
Valuations Ratios
BVPS (Rs) 324.4 344.3 471.2 543.1 637.9
Price/BV (x) 5.3 5.0 3.6 3.2 2.7
Adjusted BVPS (Rs) 316.0 329.6 457.4 524.8 618.4
Price/Adj. BV (x) 5.4 5.2 3.7 3.3 2.8
Balance Sheet (Rs. mn) EPS (Rs) 44.9 52.8 64.7 83.8 106.8
Y/E March FY08 FY09 FY10E FY11E FY12E P/E (x) 38.2 32.5 26.5 20.6 16.0
Cash and bal with RBI 125,532 135,272 139,572 156,442 186,566 Dividend Yield 0.5 0.5 0.4 0.4 0.4
Inter‐bank balance 22,252 39,794 24,099 36,149 45,186
Loans 634,269 988,831 1,211,317 1,514,147 1,892,683 Dupont Analysis
Investments 493,935 588,175 634,619 783,232 941,385 Y/E March FY08 FY09 FY10E FY11E FY12E
Total int earning assets 1,275,988 1,752,072 2,009,608 2,489,970 3,065,821 % of Average assets
Fixed Assets 11,751 17,067 20,419 21,660 23,278 Net‐Interest Income 4.7 4.3 4.2 4.3 4.4
Other Assets 44,026 63,568 77,559 80,285 89,977 Non‐Interest Income 2.0 1.9 2.1 1.9 1.8
Total Assets 1,331,766 1,832,708 2,107,586 2,591,916 3,179,076 Net Income 6.7 6.3 6.3 6.2 6.1
Deposits 1,007,686 1,428,116 1,606,630 2,008,288 2,510,360 Operating Expenses (3.3) (3.2) (2.9) (2.8) (2.8)
Other Int bearing Liab 78,440 91,636 127,152 145,008 161,031 Operating Profit 3.4 3.0 3.4 3.4 3.4
Total Int. bearing liab 1,086,126 1,519,752 1,733,782 2,153,296 2,671,391 Provisions (1.3) (1.1) (1.2) (1.1) (0.9)
Other non‐int. bear. liab 130,667 162,428 159,244 191,368 217,268 Taxes (0.6) (0.6) (0.7) (0.7) (0.8)
Total Liabilities 1,216,794 1,682,180 1,893,027 2,344,664 2,888,658 RoA (%) 1.4 1.3 1.5 1.6 1.7
Equity 114,972 150,527 214,559 247,252 290,418 Avg.assets/avg eq. (x) 12.5 12.3 10.8 10.2 10.7
Total Liab & Equity 1,331,766 1,832,708 2,107,586 2,591,916 3,179,076 RoE (%) 17.7 16.1 16.1 16.5 18.1
Source: Company, Networth Research
Note: Ratios for FY09 are calculated assuming merged financials for FY08 & FY09
HDFC Bank 15
Networth Research: E‐mail‐ research@networthdirect.com
Satish Pasari Head‐ Institutional Business satish.pasari@networthdirect.com 022‐22823225/22840219
Institutional Research Team
Anand Dama Banking & Financial Services anand.dama@networthdirect.com 022‐30286391
Sanjeev Hota IT / Education sanjeev.hota@networthdirect.com 022‐30286407
Ashwani Sharma Power / Capital Goods ashwani.sharma@networthdirect.com 022‐30286389
Kanika Bihany Engineering / Capital Goods kanika.bihany@networthdirect.com 022‐39517618
Gaurav Soni Cement gaurav.soni@networthdirect.com 022‐39517618
Chintan Mehta Metals/mining chintan.mehta@networthdirect.com 022‐30281580
Rupali Nambiar Economy rupali.nambir@networthdirect.com 022‐39517620
Derivative & Technical Team
Akshata Deshmukh Sr. Technical & Derivatives Analyst akshata.deshmukh@networthdirect.com 022‐39517632
Manoj Karnani Sr. Manager – Derivatives manoj.karnani@networthdirect.com 022‐22840219
Amol Shrivastava Derivatives Analyst amol.shrivastava@networthdirect.com 022‐39517638
Ankit Bhat Research Associate ankit.bhat@networthdirect.com 022‐39517638
Quantitative Research
Shubha Aggarwal Research Analyst shubha.aggarwal@networthdirect.com 022‐30281580
Ritesh Jain Research Analyst ritesh.jain@networthdirect.com 022‐30281580
Networth Institutional Sales: E‐mail‐ dealing@networthdirect.com
Prakash Diwan Head‐Institutional Sales & Strategy prakash.diwan@networthdirect.com 022‐30286403/30286389
Nilesh Sangani AVP – Institutional Sales and Dealing nilesh.sangani@networthdirect.com 022‐30286403/39517635
Ronak Maniar Institutional Sales and Dealing ronak.maniar@networthdirect.com 022‐30286403/39517635
Shalaka Jadhav Sr. Manager ‐ Institutional Sales & Dealing shalaka.jadhav@networthdirect.com 022‐22840217/39517636
Key to NETWORTH Investment Rankings
Buy: Upside by>15, Accumulate: Upside by +5 to 15, Hold: Upside/Downside by ‐5 to +5, Reduce: Downside by 5 to 15, Sell: Downside by>15
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HDFC Bank 16