CASE STUDY

HD Stable margins and strong asset quality 1Q net profit up 34% YoY, 2% ahead of expectations: HDFC Bank reported 1QFY12 net profit at `10.9bn, up 34% YoY and 2% ahead of expectations. Key positives were a) margins (reported) steady at 4.2%, driving 19% YoY growth in NII, b) core non-interest income up 20% YoY (3.5% ahead of JMFe), and c) asset quality remained impressive with LLP at 41bps and net NPLs at 18bps.

Loan book up 10%QoQ; supported by both retail and wholesale loan-book: Wholesale loan book was up 15% QoQ, driven partly by some large disbursements to oil companies and FCI (adjusted growth was 6-7% QoQ). Retail loan book grew 5% QoQ. Auto loans (40% of book) grew 6% QoQ. Personal loans (up 7% QoQ) and credit cards (up 11% QoQ) saw healthy growth as well. Management highlighted that there are early signs of slowdown in car loan disbursements but CV loans are still holding up. We estimate loan book CAGR of c.22% for FY11-13.

 NII growth (19% Y0Y) and core fee income growth (20% Y0Y) drive healthy top-line; CI ratio remains steady: Reported margins remained resilient at 4.2% as the bank was able to pass on the higher cost of deposits (base rate and PLR were up by 80bps and 75bps respectively in 1Q12). Core CASA ratio declined slightly to 49.1% (4Q11: 51%). Core non-interest income growth of 20% YoY was driven by forex. CI ratio at 48.8% was flat QoQ. We estimate stable margins(calculated) at c.4.4% for FY12-13 to drive NII CAGR (FY11-13) of 20%. We forecast fee income CAGR (FY11-13) of 20%. Impressive asset quality with LLP at c.41bps excluding floating provision of `2.5bn: Asset quality was robust as net NPLs were stable at 0.18% and coverage ratio at 83%. Slippages (annualized) were at c.85bps. Management said adjusting for some slippages in MFI portfolio, gross NPAs were broadly flat QoQ. Thus, total provisions grew only 3% QoQ despite the bank making floating provisions of `2.5bn. At 1Q12-end, outstanding floating provisions are at c.`9.85bn. We build an increase in adj credit cost to 1.1% for FY12E from its lows of 0.63% in FY11E. Retain estimates on strength in margins, asset quality; maintain BUY andMar12 TP of `560: HDFC Bank would continue to deliver ROA in excess of 1.6% for FY11-13 on resilient margins backed by strong liability franchise, stable cost ratios and lower provisioning cost. Earnings would register strong 23% CAGR driven by robust asset CAGR of 20% for FY11-13E. Our Mar12 TP of `560 values the bank at 22x Mar13 EPS.

HDFC Bank - 1Q12 trends HDFC Bank reported 1Q12 profit 2% ahead of our estimate on better than expected core non-interest income and lower operating expenses.
Exhibit 3. HDFC Bank: Actual vs estimates Actual vs. Estimates Adj. Net Interest Income Total Non-interest Income Total Income Total Operating Expenses Operating Profit (PPP) Total Provisions Adjusted Profit Source: Company, JM Financial. (` mn) A/E (%) -2.4% 6.9% 0.1% -4.0% 4.3% 19.9% 1.7%

1Q11E 29,183 10,476 39,659 20,158 19,501 3,700 10,666

1Q12A 28,480 11,200 39,680 19,346 20,334 4,437 10,850

Exhibit 4. HDFC Bank: 1Q12 - Results summary Earnings Table (` mn) 1Q11 4Q11 NII 24,011 28,395 Fee based Income 7,962 10,006 Forex Income 1,718 2,454 Trading Profits 215 86 Misc Income 9 12 Non-Interest income 9,904 12,558 Total Income 33,916 40,952 Employee Cost 6,671 7,334 Other Operating Expenses 9,758 12,650 Total Operating Expenses 16,429 19,984 Operating Profit 17,487 20,969 Loan Loss Provisions* 3,651 1,001 Other Provisions 1,899 3,312 Total Provisions 5,550 4,313 PBT 11,937 16,655 Tax 3,820 5,508 Reported Profit 8,117 11,147 Balance sheet (` bn) Deposits Net Advances Total Assets Low-cost Deposits (%) Loan-Deposit ratio (%) Key Ratios Credit Quality 1,830.3 1,462.5 2,332.5 49.2% 79.9% 2,085.9 1,599.8 2,773.5 52.7% 76.7%

1Q12 YoY (%) 28,480 18.6% 9,227 15.9% 2,301 33.9% -413 n.a. 85 n.m. 11,200 13.1% 39,680 17.0% 7,810 17.1% 11,536 18.2% 19,346 17.8% 20,334 16.3% 1,662 -54.5% 2,775 46.1% 4,437 -20.1% 15,897 33.2% 5,047 32.1% 10,850 33.7% 2,111.5 1,755.2 2,859.4 49.1% 83.1% 15.4% 20.0% 22.6% -0.1% 3.2%

QoQ (%) 0.3% -7.8% -6.2% n.a. n.m. -10.8% -3.1% 6.5% -8.8% -3.2% -3.0% 66.0% -16.2% 2.9% -4.6% -8.4% -2.7% 1.2% 9.7% 3.1% -3.6% 6.4%

Gross NPAs (` mn) 17,912 Net NPAs (` mn) 4,125 2,964 3,185 -22.8% 7.5% 16,943 18,331 2.3% 8.2%

Gross NPA (%) Net NPA (%) Loan Loss Provisions (%) Coverage Ratio (%) Capital Adequacy Tier I (%) CAR (%) Du-pont Analysis NII / Assets (%) Non-Interest Inc. / Assets (%) Operating Cost / Assets (%) Operating Profits / Assets (%) Provisions / Assets (%) ROA (%)

1.21% 0.28% 1.17% 77.0% 12.40% 16.30% 4.22% 1.74% 2.88% 3.07% 0.97% 1.42%

1.05% 0.19% 0.28% 82.5% 12.20% 16.20% 4.31% 1.91% 3.03% 3.18% 0.65% 1.69%

1.04% 0.18% 0.00% 82.6% 11.40% 16.90% 4.04% 1.59% 2.75% 2.89% 0.63% 1.54%

-0.18% -0.10% -1.17% 5.66% -1.0% 0.6% -0.17% -0.15% -0.14% -0.18% -0.34% 0.12%

-0.01% 0.00% -0.28% 0.12% -0.8% 0.7% -0.26% -0.31% -0.28% -0.29% -0.02% -0.15%