HDFC Bank

HDFC, CBoP merger marginally in favour of former

February 25, 2008 „ HDFC Bank and Centurion Bank of Punjab (CBoP) boards have given in-

Event Update
principle approval for a merger between the two banks. The deal is
likely to be valued at just under Rs100bn based on last Friday’s,
Rating Outperformer (February 22nd) closing prices and a swap ratio of 1:29. The market was
expecting a marginally higher valuation for CBoP; hence we feel the final
Price Rs1422
swap ratio is slightly in favour of HDFC Bank.
Target Price Under Review
„ HDFC Bank is likely to issue 67 million shares to CBoP shareholders,
Implied Upside N/A
resulting in 19% expansion in current equity base to Rs4.2bn from
Sensex 17,651 Rs3.5bn at present.
(Prices as on February 25, 2008)
„ Post merger, HDFC Bank’s shareholding is likely to come down from
23.3% at present to 19.6% and the bank has made an offer to HDFC to
make a preferential allotment post the merger to help it maintain its
Trading Data current share holding in the bank. Post preferential allotment to HDFC,
Market Cap. (Rs bn) 503.9 the total equity base is likely to increase by 25% to Rs4.4bn from Rs3.5bn
Shares o/s (m) 354.1
at present.
Free Float 77.7% „ The deal is priced on the higher side, considering CBoP’s profitability and
Avg. Daily Vol (‘000) 103.5
return ratios being much lower than that of HDFC Bank. The positive side
is that HDFC Bank gains access to 394 branches of CBoP, which will make
Avg. Daily Value (Rs m) 167.4
the combined entity have the highest private banking branch network of
1,148 branches in the country.
„ Our estimates suggest that, based on currently available facts on the
expected merger, FY08E & FY09E EPS (for HDFC Bank post merger) are
Major Shareholders likely to decline by 11% from the standalone expected EPS for the same
Promoters 23.3% period.
Foreign 50.3% „ However, the decline in HDFC Bank’s RoE and EPS due to the significant
Domestic Inst. 6.2% impending dilution in equity, we feel stock performance in the near term
Public & Others 20.2% is likely to remain subdued. We maintain Outperformer rating on the
stock, while our target price is under review.
Key financials (Rs m) FY07 FY08E FY09E FY10E
Net interest income 37,096 54,513 75,358 101,686
Growth (%) 45.7 47.0 38.2 34.9
Stock Performance
Operating profit 25,639 39,511 51,707 67,580
(%) 1M 6M 12M PAT 11,419 16,015 21,158 28,054
Absolute (11.2) 29.1 48.5 EPS (Rs) 35.8 45.0 59.5 78.9
Growth (%) 28.5 25.9 32.1 32.6
Relative (7.4) 6.8 19.0
Net DPS (Rs) 8.2 11.3 14.9 19.7

Source: Company Data; PL Research * Financials of HDFC Bank pre-merger

Price Performance (RIC:HDBK.BO, BB:HDFCB IN) Profitability & valuation FY07 FY08E FY09E FY10E
2000 NIM (%) 4.5 4.8 4.7 4.7
RoAE (%) 19.5 17.6 16.9 19.6
1800
RoAA (%) 1.4 1.4 1.3 1.3
1600 P / BV (x) 7.1 4.3 3.8 3.3
P / ABV (x) 7.3 4.4 3.9 3.4
(Rs )

1400
PE (x) 39.8 31.6 23.9 18.0
1200
Net dividend yield (%) 0.6 0.8 1.0 1.4
1000
Source: Company Data; PL Research * Financials of HDFC Bank pre-merger
800
Apr-07

Dec-07
Feb-07

Jun-07

Aug-07

Oct-07

Abhijit Majumder Bharat Gorasiya

AbhijitMajumder@PLIndia.com BharatGorasiya@PLIndia.com
Source: Bloomberg
+91-22-6632 2236 +91-22-6632 2242
 HDFC Bank

Details of merged entity

1. HDFC Bank would become the seventh largest Indian bank in terms of total
assets (as on March 2007), up from the 11th place earlier.

2. It will have the largest branch network among private sector banks.

3. Will have a larger footprint in the northern and southern parts of the
country.

4. NIM likely to decline as CBoP’s margins are lower than that of HDFC Bank.

5. Asset quality likely to deteriorate post merger.

Key financials (Rs bn)

Particulars HDFC Bank CBOP HDFC Bank
post merger
Advances 714 151 865
Deposits 994 207 1,201
Low cost deposits 506 51 556
% of total 50.9 24.5 46.3
Business 1,708 358 2,066
Total assets 1,314 254 1,568
Asset quality
GNPAs 8.7 5.6 14.3
NNPAs 2.8 2.5 5.3
GNPAs (%) 1.2 3.7 1.7
NNPAs (%) 0.4 1.7 0.6
Coverage 68% 55% 63%
Size
Branches 754 394 1148
Licences in hand 180 20 200
ATMs 1906 452 2358
Employees 35,200 8,300 43,500
Profitability
NIM (%) 4.50 3.60 4.35
PAT 16.0* 1.6** 17.6
* FY2008E PAT
** M9FY08 annualized PAT

February 25, 2008 2

 HDFC Bank

HDFC Bank gearing for competition

ICICI Bank, the largest private sector bank in the country, is likely to open
around 425 new branches by June 2008, taking its total tally to 1,380. HDFC
Bank, which currently has 754 branches and approval for 200 other branches,
is in for stiff competition from ICICI Bank its peers who are eager to increase
their share in the low cost deposit base. Hence, the current merger will
catapult HDFC Bank with the highest network among private banks.

Additional branches counter balance high deal value

At times when branch licences are difficult to come by and with the
possibility of the sector opening up to foreign competition post March 2009,
leading domestic private banks are unlikely to sit idle. There is high
possibility that these banks scale up their reach through the organic and
inorganic route. We feel CBoP’s major presence in the northern part of the
country (in Punjab post its merger with Bank of Punjab) and in the south
(post its acquisition of Lord Krishna Bank) gives HDFC Bank sufficient room to
leverage these branches going ahead.

Profitability and return ratios to be affected

HDFC Bank’s NIM at 4.5% is much higher than CBoP’s 3.6%, hence we expect
NIM of the merged entity to decline in the medium term, but show
improvement once HDFC Bank is able to leverage branches optimally. HDFC
Bank’s productivity and profitability ratios are among the best in the
industry, which is also expected decline in case of the merged entity.

Outlook & valuation

The HDFC Bank scrip has corrected in the recent past along with other major
banking stocks. The stock has underperformed the market in recent times
with a decline of 22% from its high in January 2008, while the market has
corrected by 15% in the same period. We feel the premium valuations for
HDFC Bank is likely to get toned down due to decline in NIM, RoE and EPS,
post merger. Again the integration of CBoP operations remains a key
challenge. Hence, we feel in the near term the stock performance is likely
to remain subdued; however, we maintain Outperformer rating on the stock,
while our target price is under review.

February 25, 2008 3

 HDFC Bank

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India.
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

PL’s Recommendation Nomenclature

BUY : > 15% Outperformance to BSE Sensex Outperformer (OP) : 5 to 15% Outperformance to Sensex
Market Performer (MP) : -5 to 5% of Sensex Movement Underperformer (UP) : -5 to -15% of Underperformace to Sensex
Sell : <-15% Relative to Sensex
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (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 accept 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.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or
engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.
We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

February 25, 2008 4