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Innate resilience; enduring growth…
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 trying times. 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 conditions and sufficient low cost funds to generate better margins at lower risk. We believe that the banks revived growth phase will also be qualitative, bringing in more stability, comfort and resilience during tough times. Key Data Bloomberg Code Reuters Code NSE Code Current Share o/s (mn) MktCap (Rsbn/USDmn) 52 Wk H/L (Rs) Daily Vol.(3M NSE Avg) Face Value (Rs) Beta 1USD/INR Rating Target Price CMP Upside Sensex
Accumulate Rs1940 Rs1713 13% 17,189
91 22 3028 6391 th Date: 8 January, 2010
Impeccable asset quality with one of the lowest stressed assets: HDFC Bank has maintained robust asset quality with one of the lowest stressed assets amongst peers at about 2.3%, including GNPA at about 1.8%, despite higher retail exposure and economic slowdown, primarily due to its prudent lending practices and conservative provisioning policies (provision coverage at above 70%). Return ratios to improve, but remain below historical averages: Bank has registered average RoE of about 20% over past 10 years, however, off‐late 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 the bank productively deploys the infused capital and earnings gain traction with 29%CAGR over FY09‐12E.We expect improved NII and fee income contribution to drive RoA at about 1.7% by FY12E. Rich valuations to stay; recommend accumulate: With profitable and qualitative growth set to return and adverse impact of the expensive CBoP merger waning, bank would continue to enjoy premium. However, after significant re‐ rating, stock is richly valued at 20.4x EPS and 3.3x FY11E adj.BV leaving limited upside. We value bank assigning a P/adj BV of 3.7x on FY11E adj.BV to arrive at a target price of Rs1938, providing an upside of 13% from current levels. Hence, recommend an accumulate rating on the stock. Key risks: Higher delinquencies and slower branch expansion
HDFCB IN HDBK.BO HDFCBANK 429.0 734.9/16089.8 1839/774 0.8mn 10 0.99 46.7
Shareholding Pattern Promoters FII Others
(%) 23.9 27.5 48.7
Price Performance (%) 1m HDFCB ‐8.1 NIFTY 3.9
6m ‐3.5 5.6
1yr ‐7.6 80.2
Source: Bloomberg;*As on 7th Jan, 2010
Y/E Mar (Rs mn) FY08 FY09 FY10E FY11E FY12E NII
Adj BV (Rs)
52,279 74,212 83,479 101,432 126,199
50.7 42.0 12.5 21.5 24.4
75,110 107,118 124,142 123,313 141,916
50.7 42.6 15.9 17.9 20.8
15,902 22,450 29,441 38,155 48,629
39.3 41.2 31.1 29.6 27.5
44.9 52.8 64.7 83.8 106.8
316.0 329.6 457.4 524.8 618.4
17.7 16.1 16.1 16.5 18.1
1.4 1.3 1.5 1.6 1.7
38.2 32.5 26.5 20.4 16.0
5.4 5.2 3.7 3.3 2.8
Source: Company, Networth Research
Networth Research is also available on Bloomberg and Thomson Reuters
NABARD and SBI. Aditya Puri MD Mr. which is primarily into broking business and HDB Financial services. including operations and corporate credit management Mr. he was Deputy Governor of RBI. strong earnings traction. he worked with Citibank for nearly 9 years. NHB.9 0. Harish Engineer ED Source: Company.8 4. He has been associated with the bank since 1994 in various capacities and is currently responsible for wholesale banking division. It acquired Times Bank in Feb 2000 and Centurion Bank of Punjab (CBoP) in year 2008.Paresh Sukthankar ED Mr. The integration process of erstwhile CBOP branch is complete and will be brought to HDFC Bank productivity standards within next 12‐15 months. which made it more resilient during global crisis. Exhibit 1: DuPont analysis (FY09) (%) 20 18 16 14 12 10 8 6 4 2 0 18. Exhibit 2: Key events 1994 1995 2000 2008 Incorporate by HDFC IPO @Rs10 Acquisition of Times bank in a share swap deal (1:5. Bank has extensive network of more than 1500 branches and balance sheet size of about Rs1939bn. He is MD of the bank since Sept 1994 and has more than 25 years of experience in banking industry.1 10. The bank’s strengths include its strong brand image. Prior to joining HDFC Bank. which is in to micro‐lending. Jagdish Capoor Chairman He took over as Bank’s chairman since July 2001. high CASA ratio and relatively better asset quality. The bank has pursued both organic and inorganic growth strategies to emerge as a strong player in private banking space. Prior to HDFC Bank. He was appointed on 12 Oct 2007 for a three‐year term. incorporated in 1994 by the Housing Development Finance Corporation (HDFC). Bank has limited international exposure and is not aggressively pursuing building an huge international book. Eq NII Non‐ Interest Income Opex Provisions Taxes Source: Company. proficient management.8 1. He holds a Bachelors Degree in Commerce from Punjab University and is an associate member of the ICAI. RoE Asset/Avg.8 0.75) Acquisition of Centurion Bank of Punjab in a share swap deal (1:29) 1. distribution and collection business. He has been associated with the bank from 1994 in various senior capacities and has over 22 years of experience in finance and banking.7 RoA Avg. Networth Research Exhibit 3: Key management personnel Name Position Source: Company. He also served on the boards of EXIM Bank. Prior to joining the bank. He holds a Masters Degree in Commerce and is a Fellow of Indian Institute of Banking & Finance. Networth Research HDFC Bank 2 . Networth Research Profile Mr. he was heading Citibank’s Malaysia operations. Bank also has two non‐banking subsidiaries – HDFC Securities. He has over 38 years of experience in banking & finance and has prior experience working with Bank of America for 26 years in various areas.7 Company Background HDFC Bank.4 2. is amongst the leading and relatively consistent private sector banks in the country today.
RBI. bank has even adopted in‐organic growth strategy acquiring two banks (Times bank and CBoP) through its journey till now. strong & consistent financial performance and sound risk management systems in place resulting in best asset quality even during the trying times. which is a mainstay for the banks sector‐beating margins (>4%). The bank has consistently outperformed the broad industry with 52% asset CAGR. Networth Research HDFC Bank 3 . To gain scale and emerge as a stronger private banking player. we estimate earnings trajectory to remain strong and consistent with 29% PAT CAGR. bank has adopted liability driven growth strategy with clear focus on margins. Networth Research Source: Company. Since inception. Networth Research Exhibit 6: Credit growth well above industry (YoY) % 160 140 120 100 80 60 40 20 0 ‐20 FY00 FY01 FY02 FY03 FY04 FY05 HDFCB Exhibit 7: Gained market share even in tougher times % 6 5 4 3 2 1 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Share in industry credit Share in pvt banks credit Share in industry CASA Share in pvt banks CASA 30 25 20 15 10 5 0 FY06 FY07 FY08 FY09 Q2FY10 SCB HDFC (adj for merger) Private Source: Company. robust but qualitative growth oriented bank will emerge as sustainable winners in long run. We believe that banks such as HDFC bank with strong low‐cost liability franchise. Bank has gained significant market share in industry credit and CASA deposits. RBI. consistent and resilient private banking player HDFC bank is one of the best banking franchises among Indian banks with an unparalleled liability network. when many banks were affected. Investment Rationale Strong. profitability and sound asset quality.7% over FY09‐12E. RBI. Networth Research (SCB – Scheduled Commercial banks) Source: Company. Exhibit 5: Better RoE vis‐à‐vis industry % 30 25 20 15 Exhibit 4: Consistent PAT growth above 30% % 100 80 60 40 20 10 0 ‐20 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 HDFCB (adj for merger) Private SCB HDFCB PSU 5 0 FY00 FY01 FY02 FY03 HDFC FY04 Private FY05 FY06 PSU FY07 SCB FY08 FY09 Source: Company. During the recent sub‐prime crisis. Going‐forward. RoE at 18% and RoA at 1. Bank characterises a combination of private aggression with a positive flavor of PSU (strong liability franchise and conservatism). 61% credit growth and delivering average PAT growth of 40% and RoE of 20% over past 10 years. HDFC bank remained a safe harbor as it had virtually no exposure to these toxic assets nor any material international exposure. RBI.
Out‐performance during recent quarters also indicates banks inherent strength and strong resilience Despite economic slowdown. 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.2 Loan growth (YoY) PAT growth (YoY) NIM Source: Company. which in a way secures the bank from any significant adverse moment in G‐Sec yields. 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. but adversely impacted banks financials and to make it worst followed by global slowdown due to sub‐prime crisis. Approximately 40% of the GNPA’s as on during FY09. However.0 3. high‐risk loans and under‐productive though potential.4 4. bank acquired retail focused Centurion bank of Punjab (CBoP) at a relatively higher cost. HDFC Bank 4 . Further. erstwhile CBoP’s high‐risk loan portfolio has almost run‐off except for personal loans.5 4. which will take another 12‐15 months and thus do not pose significant risk anymore.6 4. were contributed by CBoP.3 4. maintaining its sector‐beating margins above 4% and sound asset quality. leading to improved financial ratios and better valuations for the bank. Recent quarterly performance indicates that bank is back in growth phase.7 4. but at the same time restricts higher trading gains in case of declining yields scenario. We expect the full benefits of the merger to flow in. HDFC Bank registered consistent ~30% PAT growth. The merger brought with it elevated cost structure. courtesy its inherent strength and resilience. Though merger gave bank a needed scale. Exhibit 8: Smart post merger recovery evident % 60 50 40 30 4.8 3.1 20 10 0 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 4. branch network and biggest challenge in form of integration process. it has a reasonably lower proportion of book in to AFS category (at about 25%). However. justifying its premium valuation and making it a bell‐ weather bank. outperforming industry.9 3. We believe that the bank’s strategy to maintain strong but consistent performance is the key to the banks success. 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.
justifying the premium it commands. consistent financial performance with impeccable asset quality. with Tier‐I capital at about 11.0 48.2 13.0 28.0 4. RoA set to improve with improving NII/Assets and fee income Source: Networth Research Note: Primarily FY09 figures.0 54.1 94.1 74. We expect NIM's to remain range bound at about 4.0 41.3 2.2 7. but to remain below historical averages.0 6.7 10.0 Qualitative asset profile leading to lower NPA's and capital requirement.1 1.0 54.6%.1 HDFC bank commands sector beating margins owing to strong low‐cost franchise to fund higher yielding assets.5% over FY09‐12E Asset quality (%) GNPA (Q2FY10) Stressed Assets (Q2FY10) Provision coverage (exc. but used Q2FY10 numbers as well wherever available and relevant HDFC Bank 5 .4 43.0 4.4 1520 15. Expect CAR at comfortable level of about 15. We estimate credit growth at 24% on high base over FY09‐12E.0 1.5 4.7 13.1 37.5 10.3 3.0 51.5 18.3 2. Despite slowdown.6% by FY12E without further capital infusion HDFC Axis ICICI Commentary Margins (%) NIM ‐ FY09 NIM ‐ Q2FY10 Yield on advances Cost of deposits Interest spread NII/Assets 4.6 6.0 45.0 22.1 6.9 7.5 11.0 55.5 2.5 71.1 63. Exhibit 9: Key business and financial summary of peer banks Comparative Parameters Business Metrics (%) Branches (Q2FY10) Asset (3 yr CAGR) Credit growth (3 yr CAGR) Retail Portfolio (%) C‐I ratio CASA ratio (Q2FY10) CASA per branch International/Global business Capital Adequacy (Q2FY10) Tier I (Q2FY10) 1506 36.7 50.5 10.0 43.2 51. C‐I ratio coming‐off Branch expansion and merger synergies to help sustain industry best CASA ratio.5 22.9 2.4 15.7 7.0 17.4 Plans to add about 200‐250 branches every year Phenomenal growth but with quality. Higher retail portfolio but lower NPA's Post merger.4 7.0 RoEs to improve further.8 3. Tech w/offs) Capital Market exposure Commercial Real estate exposure High‐risk industry exposure RWA/Total Assets 1.0 3. 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.0 44.8 1.8 2.0 2.0 14.6 4. strong & dynamic management and parental support from HDFC.2 4.4‐4. banks NIM's remained nearly stable.0 50.3 16.0 7.4 70.0 0.9 916 44. HDFC bank scores well on most of the parameters and has emerged as a consistent and seasoned private banking player over the years.3 19. Best asset quality with one of the lowest stressed assets. Provision coverage well within RBI's prescribed levels Profitability (%) RoE RoA 16.1 4.8 6.1 1. Lower international exposure saved the bank from sub‐prime effect Recent warrant conversion will lead to 250bps improvement in Tier‐I capital.1 2. As indicated in below table. strong fee income.6 6.4 7.
but with quality After adopting go‐slow strategy considering economic slowdown and expensive CBoP acquisition. primarily driven by corporate (35% in 1HFY10) and car loans (10% in 1HFY10). personal loan. along with acquired home loan portfolio from erstwhile CBoP. CBoP’s high risk 2W portfolio has virtually run‐ off. Within retail portfolio also bank has consciously allowed high risk 2W and LAS portfolio to run‐off and has kept its CV. Systemic demand for retail loans (especially auto and housing loans) has improved. The growth has come despite run‐off on CBoP portfolio.0 15 10 5.3 ‐1. while personal loan portfolio would take another 12‐15 months.0 5 0 ‐0. As a strategy. help fulfill its priority sector lending target and also improve the duration of the portfolio.5 22. HDFC bank has been a dominant player in auto financing with more than 30% market share amongst banks and with auto sales reviving. business banking and credit card portfolio nearly stable. The bank is still not looking aggressively at building international loan book. As per management. which should make the retail portfolio more secured. We believe that banks revived growth phase will also be qualitative. bank is likely to register better growth in this segment. which should further insulate bank from any near term shocks in international markets. bank is gearing up to get back on growth path. Bank has indicated that it will like to further explore opportunities in mid to long term infrastructure financing. bank will continue to focus on corporate loan growth.6 ‐5 4. comfort and resilience during tough times. Networth Research Loan mix tilting towards corporate. Networth Research Source: Company.6 5 0. bank has consciously build up its relatively low risk corporate loan book. subject to appropriate pricing. Bank has been retaining home loans originated by it for HDFC limited (in contrast to earlier practice of transferring the loans to HDFC). Bank has registered about 11%YoY and 10%QoQ growth during Q2FY10.1 0 ‐5 Q1FY09 Q2FY09 ‐3. bringing in more stability. which would increase the duration of its loan portolio. Exhibit 10: QoQ loan growth reviving Exhibit 11: Better loan growth v/s peers & industry(1HFY10) % 25 20 15 10 5.4 Q3FY09 ‐10 ‐15 ‐12. Growth set to return.3 9. 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.6 HDFC ICICI Axis SBI SCB Pvt % 20 15. but with macro‐ economic risks retreating. bank is also likely to register significant revival in retail loan growth. after negative sequential growth in Q3FY09 and flat growth in Q4F09. We estimate bank to register better than system credit expansion at about 24% CAGR over FY09‐12E. HDFC Bank 6 . which is evident during past 2 quarters.5 5.4 Q4FY09 Q1FY10 Q2FY10 Source: Company. well supported by improving economic conditions and sufficient low cost funds to fund higher credit growth at better margins.
3%.5 0.5 1.9 20% 0% 38. indicating likely peaking of delinquencies in near term. overall stressed assets including restructured assets stood at about 2. high‐risk loan portfolio (2W’s and personal loans) acquired from CBoP.8 2.8%. serious concerns were raised about banks asset quality.2 Q4FY08 Corporate 2W LAS Q1FY09 Q4FY09 Q1FY10 Q2FY10 PV Personal Business banking CV Credit Card Housing & others Source: Company.0 44. Exhibit 13: Asset quality risks nearly peaked (%) 2. However. 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. primarily due to its prudent lending practices and conservative provisioning policies.4 38. we conservatively estimate GNPA at about 1.6 2. GNPAs declined 6%QoQ during Q2FY10 to 1. which is one of the lowest in the industry. Networth Research HDFC Bank 7 .9 Exhibit 14: Lowest stressed assets amongst peers (Q2FY10) % 9 8 7 6 5 4 3 2 1 0 HDFC Axis KMB GNPA UBI ICICI SBI PNB Restructured loans BOI 2. Exhibit 12: Loan composition shifting towards corporates 100% 80% 60% 40% 43.1 1.9% and NNPA at 0. Networth Research Source: Company.1 1.3 1. factoring in higher retail portfolio including CBoP portfolio. higher share of retail book. 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.1 2.5% by FY12E.0 1.0 FY10E FY11E Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 FY12E FY07 FY08 GNPA NNPA Source: Company.5 1.5 1.9 1.2 41. Considering stressful economic environment. However sensing the stress.3 1. Further. 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.0 0.0 2.
providing enough cushion for higher NPA provisioning. which helps in procuring low cost CASA deposits and thus control cost of funding in long run to maintain margins. which provides the flexibility to lend at competitive rates to customers and still maintain one of the best margins in the industry. bank has maintained higher CASA ratio in the range of about 40%‐55%. Exhibit 16: Well spread CASA rich branch network Exhibit. keeping its net NPA well below 1% over FY09‐12E. 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.7 86. Traditionally. if required.2 67. Networth Research Source: Company.1 68.6 75. 17: HDFC Bank has higher share of metro+urban branches 100% 90% 10% 5% 23% 33% 53% 34% 28% 25% 29% 39% 32% 16% ICICI Bank Metro HDFC Bank Urban Axis Bank Semi‐urban Federal Bank Rural 40% 4% 24% 6% East 9% Central 10% North 30% 80% 70% 60% 50% 40% 30% 20% 10% 0% West 25% South 26% Source: Company. We estimate operating profits to grow at 23% CAGR over FY09‐12E.2 Source: Company. which is well above RBI’s prescribed level of 70%. Historically.1 83. Most of the banks have realised importance of maintaining adequate branch network. Networth Research HDFC Bank 8 . 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%).5 69. which has been further amplified with acquisition of CBoP.8 91. HDFC bank has been aggressive on this front since its inception and has even acquired banks to bolster its branch network. bank had strong presence in North. We expect NPA coverage to be in the range of about 74‐76%.5 76. West and southern region. Exhibit 15: Adequate provision coverage above 70% % 95 90 85 80 75 70 65 60 55 50 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E 69.8 74.
with falling term deposit rates. bank had consciously slowed down branch expansion for about 3 quarters till Q1FY10. However. Branch expansion back on track after a lull Post merger. Higher savings deposits has been due to banks wide‐spread branch network and its focus on corporate salary a/cs. CASA ratio has already started shown signs of improvement to about 50% in Q2FY10 (Core CASA ratio – 47%). majority of which will be stripped down version of branches. We believe that significant branch expansion. 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. banks CASA ratio had fallen to about 40% during Q3FY09 from a high of 54% pre‐merger. integration of erstwhile CBOP branches and continued branch expansion supported by float arising from improved transactional banking and IPO’s. Exhibit 18: Bank to add about 200‐250 branches every year Nos 2500 2000 1500 1000 500 0 FY07 FY08 FY09 Q2FY10 FY10E FY11E FY12E 419 1412 684 761 1506 1836 2036 1686 Source: Company. Networth Research HDFC Bank 9 . 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. off‐late with integration process of CBoP branches over and economy back on track. 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% 19% 50% 40% 30% 29% 20% 10% 0% HDFC Savings ICICI Current Axis PNB CASA mobilisation during 1HFY10 25% 24% ‐2% 21% 12% 19% 16% 13% 8% 7% 30% 2% ‐3% ‐8% 17% 12% 22% Source: Company. However. bank has revived its organic branch expansion plan opening about 90 branches in Q2FY10. It plans to open about 200‐250 branches every year.
9 4.7 4.2% during past 3 quarters with marginal compression courtesy its astounding ability to control cost of funds.6 4. credit card. Core fee income excluding forex & derivative gains contributes about 75% of the non‐interest income. Networth Research HDFC Bank 10 . we expect banks NIM to settle around 4.6 (%) 4. which endows stability and sustainability to its fee income. The bank has well diversified fee‐based product portfolio for both retail (viz loan processing. trade finance.2 3. NIM’s were under pressure owing to falling interest rates and higher cost of funds since the onset of slowdown.2 4.4 4. 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 Forex & derivatives Fees & Commission Trading income Source: Company.5 4. with credit growth back on track including revival in retail loans and improvement in CASA ratio. but is relatively strong and less volatile with non‐trading income contributing about 88% of other income.5 4.5 4. depository.5%. HDFC Bank managed to maintain its margin at about 4.4 3. However.2 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Exhibit 21: NIM’s sustained despite industry‐wide pressure 4.9 4.1 FY07 FY08 FY09 FY10E FY11E FY12E HDFC ICICI Axis SBI PNB 2.0 4. Networth Research Source: Company.8 4. Exhibit 20: NIM’s to settle around 4. CMS).8 4.4 4.5% (%) 5. Networth Research Strong.4 4.6 Source: Company. Going forward.3 4.0 2. …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). 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%. primarily on account of lower cost of funds (led by higher CASA) and better yields (higher retail exposure).5 3. third party and other fee based products) and corporate clients (viz core banking. of which nearly 75% is from retail operations.
Bank has managed to control the C‐I ratio well ahead of expectation. Exhibit 23: Fee income to trail loan growth % 80 70 60 50 40 30 20 10 0 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Loan growth 100 90 80 70 60 50 40 30 20 10 0 Non-interest income growth Fee income Source: Company. we believe that there is further scope. Networth Research Cost‐income ratio improves with synergies kicking‐in Post CBoP merger. CBoP’s acquisition (strong in fee‐based third party product distribution.3 50.1 47. treasury income outlook remains weak during 2HFY10. fee income growth is likely to remain robust with management expecting it to track loan growth.2 46. however. Bank has identified improving fee income as one of the key focus area and is taking various measures to enhance the same. however. Networth Research HDFC Bank 11 . expenses are expected to be under control and with merger benefit sinking in. During 1HFY10. Bank has strong presence in retail segment. which should further boost banks fee income.3 50 40 30 20 10 0 55. better treasury gains and pick‐up in fee income from CBoP branches. We expect bank’s non‐interest income to register 15% CAGR over FY09‐12E. As a result. indicating increased activity on corporate side. Exhibit 24: Post merger cost‐efficiency showing definitive signs of improvement % 60 50. off‐late share of corporate loans too has increased in bank’s loan portfolio. share of forex & derivative income has significantly improved in banks non‐interest income. forex & derivative business) was one such strategic move to enrich its fee‐based product basket.2 45. remittance. With integration nearly over. with core‐fee income at 17% CAGR. driven by higher treasury and fee income.7 55.0 47. which has now come‐off with synergies kicking‐in. led by significant improvement in overall productivity. non‐interest income growth has been robust. though not significant for improvement in C‐I ratio to about 45% by FY12E. HDFC banks (merged) cost‐income ratio had increased to about 56% owing to high‐cost operating structure of CBoP and integration related expenses. which had been badly affected post merger. With rising bond yields.2 45.6 46. increase its reach and customer base.1 FY10E FY11E Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 FY12E Source: Company.
8 0. Better earnings visibility emerging.2mn warrants (at issue price of Rs1530).5 i.6% by FY12E without further capital infusion.5 18.7 16.1 16.9% during Q2FY10. going forward.5 17. However.6 1. with economy well on revival and dampening impact of CBoP merger retreating.7 2.4 0. with Tier‐I capital at about 11.6%. however RoE’s to remain below historical averages Bank had consciously slowed down the pace of loan growth resulting in relatively moderate core earnings. including Tier‐I capital at about 10. we estimate RoE to improve to about 18% by FY12E.7% by FY12E. Warrant conversion led to more than 200bps increase in Tier I capital and is book value accretive as it enhanced book value by Rs87.4 1.0 1. which bank had issued to HDFC post CBoP merger to retain latter’s holding in the bank.1 0. which is also a major comforting factor for the bank. on the back of steady NIM’s.5 1.4 1. Networth Research Warrant conversion further enhances capital adequacy Bank has decent capital adequacy at about 15. however.2 1.3 19. However.1 16. Exhibit 25: Return ratios likely to improve but remain below historical average % 25 1. the same has been put to rest with market recovery and continued support from parent. better fee income and asset quality. primarily impacted due to significant equity dilution post merger. which has come down to about 16%.7%.0 Source: Company. Concerns were raised about subscription of these warrants as the stock price of HDFC bank had declined well below issue price. as bank gets back to high growth phase and productively deploys the infused capital.e 23% against equity dilution of mere 6%. Bank has registered average RoE of about 20% over past 10 years. HDFC Bank 12 . Parent ‐ HDFC has subscribed to 26. We expect better NII growth and higher fee income contribution to overall income to improve leading to better RoA at about 1.6 20 15 10 5 0 FY07 FY08 FY09 FY10E FY11E FY12E RoE-LHS RoA-RHS 1. We estimate overall CAR at comfortable level of about 15. credit and earnings growth momentum has recently picked up. We expect the bank to deliver strong and consistent 29% PAT CAGR over FY09‐12E.
0 6.5 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 HDFCB over Axis HDFC over ICICI HDFC Bank Axis ICICI Source: Bloomberg.0 4.4x EPS and 3. BV of Rs525 to arrive at a value of Rs1940.0 1.0 1. providing an upside of 13% from current levels.5x and min of 1.5 4.5 1.0 2.5 0. We value HDFC Bank assigning a P/adj BV of 3. which has helped it sail through double hit of expensive merger and economic slowdown.0 0. The stock is currently richly valued at 20. It has primarily been trading in the one year forward P/Adj BV range of 2‐4x with max P/Adj BV of 5. robust asset quality.5 2. we believe that bank would continue to enjoy premium valuations.0 4.3x FY11E adjusted BV. Bank commands premium valuation primarily due to its consistent earnings growth of above 30%.8x in past 10 years with a significant premium over sector. Exhibit 26: One year forward P/Adj BV Rs 2600 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 22‐Feb‐09 30‐Dec‐07 18‐May‐08 25‐May‐03 31‐Mar‐02 05‐Nov‐06 25‐Mar‐07 05‐Dec‐04 12‐Jul‐09 29‐Nov‐09 12‐Aug‐07 24‐Apr‐05 11‐Sep‐05 18‐Aug‐02 05‐Jan‐03 29‐Feb‐04 18‐Jul‐04 12‐Oct‐03 18‐Jun‐06 29‐Jan‐06 05‐Oct‐08 Index 26000 24000 22000 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 HDFC Bank 3.5 2. With profitable and qualitative growth well set to return and merger benefits sinking in.0 Sensex (RHS) Source: Company.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 (%) ‐0.0 0. Hence recommend accumulate on the stock. sector‐leading NIMs (>4%). sound management and all‐in‐all its ability to emerge as a strong and resilient private banking player. Valuation Analysis Rich valuations to stay.7x on FY11E adj. Networth Research Source: Bloomberg.0 2. Networth Research Exhibit 27: HDFCB sustains premium over Axis & ICICI 3.0 3.0 Exhibit 28: P/BV chart cycle – HDFC Bank v/s Axis & ICICI 7.0 2. Networth Research 1‐Aug‐09 HDFC Bank 13 .5 3. bank has build strong asset and liability base with sound business practices.0 5. recommend accumulate Over the years.
fiscal stimulus is likely to be retraced sooner. Slowdown in branch expansion: Bank has unveiled significant branch expansion plan. However. with growth coming back to fore. Networth Research Source: Bloomberg. However. asset quality stabilising and earnings gaining traction leading to improvement in its RoE. which if scaled down or not timely executed could affect CASA & business growth assumptions. due to concern on banks growth and asset quality. corporate NPA’s could still bring in pain. which could affect recovery process and overall credit growth of banking industry. posing risk to its overall loan portfolio and thus higher delinquencies. Networth Research Key risks and concerns Higher delinquencies: Though retail NPA’s have nearly peaked. Retracement of fiscal stimuli: Government has taken various fiscal measures. which has helped speedy economic recovery. but to recover Stock has underperformed the broad indices and its peers since Mar 09 market recovery. we believe that bank should perform better. Exhibit 29: Under‐performed its peers since Mar 09 recovery (%) 350 300 250 200 150 100 50 0 3‐Mar‐09 12‐Mar‐09 21‐Mar‐09 30‐Mar‐09 8‐Apr‐09 17‐Apr‐09 26‐Apr‐09 5‐May‐09 14‐May‐09 23‐May‐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 Exhibit 30: Under‐performed broad indices (%) 360 320 280 240 200 160 120 80 40 3‐Mar‐09 12‐Mar‐09 21‐Mar‐09 30‐Mar‐09 8‐Apr‐09 17‐Apr‐09 26‐Apr‐09 5‐May‐09 14‐May‐09 23‐May‐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 16‐Dec‐09 25‐Dec‐09 3‐Jan‐10 HDFC Bank Bankex Sensex Large Pvt bank index Axis ICICI HDFC Bank Source: Bloomberg. Further overall systemic risk still remains though moderated. Under‐performed broad indices and peers. HDFC Bank 14 . including supporting credit growth and in particular automobile segment.
3 76.3) 3.4 3.0 16.118 42.250 46.682.7 FY09 69.1 20.026 63.832 50.5 44.863 98.1) (0.993 10.8 20.149 634.667 162.866 20.3 0.2 524.5 51.9 1.3 FY09 163.5 471.1 15.811 6.0 25.935 588.368 1. Ratios (%) Total CAR Tier 1 CAR Profitability Ratios (%) RoAE RoAA Valuations Ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj.5 4.199 24.2 1.9) (0.9 38.2 3.892.007.317 1.5 30.107.5 FY12E 75.084 23.5 FY08 4.1 6.916 Source: Company.932 126.893.428.532 FY09 135.288 78.3) (0.328 47.008.081 107.4 (1.1 FY08 125.0 32.5 1.053 24.2 (2.7 618.6 3.7 1.4 (1.974 23.331. forex and other inc Net Income Growth (%) Operating Expenses Growth (%) Employee expenses Other expenses Pre‐Prov Profits Prov & Contingencies Loan loss provisions PBT Provision for taxes PAT Growth (%) Balance Sheet Y/E March Cash and bal with RBI Inter‐bank balance Loans Investments Total int earning assets Fixed Assets Other Assets Total Assets Deposits Other Int bearing Liab Total Int.155 29.4 44.527 214.7 10.7 37.5 35.977 3.9 6.186 1.107. mn) FY12E 186. BV (x) EPS (Rs) P/E (x) Dividend Yield Dupont Analysis Y/E March % of Average assets Net‐Interest Income Non‐Interest Income Net Income Operating Expenses Operating Profit Provisions Taxes RoA (%) Avg.269 988.175 634.6 457.044 26.479 12.7 26. Networth Research Note: Ratios for FY09 are calculated assuming merged financials for FY08 & FY09 HDFC Bank 15 .2 52.1 2.1 (2.227 29.510.708 2.153. (x) RoE (%) FY08 62.5 10.031 70.110 50.058 32.6 15.1 47.991 22.636 127.6 40.3 (2.821 23.076 2.202 85.683 941.7 49.956 10.8) 1.5 17.8 3.2 15.126 1.4 1.8 32.3 (3.514.6 55.3 17.2 FY10E 169.519 33.5 40.8 6.0 0.566 45.6 16.008 1.5 16.076 Ratios Y/E March Bal Sheet Ratios (%) Loans/Deposits CASA Ratio Loan Growth Deposit Growth Operating Ratios (%) NIM Non‐int inc/Net inc Empl Costs/ Op Costs Cost/Income Operating cost growth Total prov/avg.272 FY10E 139.988 1.116 15.4 1.4 50.2 16.152 145.8) 3.972 150.630 2.0 5.1 45.935 80.629 27.752.6 11.4 12.7 46.3 316.782 2.275.733.9 54.1 1.7 10.065.7 41.591.067 20.5 1.4 12.432 21.1 FY11E 199.608 2.360 161.391 217.4 2.5 30.179.4 (0. loans Asset Quality Ratios (%) Gross NPA Net NPA Slippage NPL coverage ratio Capital Ad.296 130.606.5 0.142 15.0 0.086.591.559 80.9 75.559 247.8 16.586 2.906 44.970 11.9 30.7 18.4 FY11E 4.572 FY11E 156.4 12.0 329.664 114.1 0.179.2 2.428 159.212 42.344.442 22.131 121.8) 3.4 324.797 16.7 2.7 47.3 5.147 493.0 6.382 32.832.1) (0.388 17.8 106.766 1.7 16.7 22.181 38.9 57.1 FY11E 75.3 83.7 40.279 50.8 2.8 41.663 23.4 FY12E 4.7 1.278 89.232 1.5 22.5 1.419 21.658 290.385 3. bearing liab Other non‐int.6 21.4 24.271 24.8 16.4 (1.654 14.9 0.7) 1. bear.4 FY10E 4.7 1.7 33.832.489.686 1.7 2.1 1.790 18.7 23.572 97.443 37.519.1 13.072 2.323 89.2 27.822 20.5 1.843 10.668 13.6) 1.7 (3.8 17.752 1.244 191.7 22.831 1.014 24.871 52.2 3.mn) FY12E 248.431 101.766 1.2 44.9 6.909 15.9 2.871 66.264 22.0 46.7 1.5 12.362 48.7 13.assets/avg eq.5 28.586 2.7 45.0 4.4 5.663 124.723 83.9 54.888.5 0.297 17.079 55.794 24.0 4.099 36.568 77.708 2.9) 3.916 1.6) 1.6 5.331.6 34.671.167 176.752 24.2 0.150 48.268 2.027 2.6 0.1 0.4 50.6 74.7 637.6 41.751 17.450 41.5 4.5 4.9 67.252 39.6 18.456 146.3 1.7 2.116 1.4 50.1 29.4 34.5 FY09 4.285 1.441 31.6 (Rs.009.3 12.619 783.0 (1.351 42.3 1.2) (0.6 10.031 2.6 543.456 54.946 51.9 66.1 3.3 16.2) 3.667 12.1 1.543 22.660 44.0 25.418 3.5 1.7) 1. Financial Summary Income Statement Y/E March Interest Earned Interest Expended Net Interest Income Growth (%) Non Interest Income Growth (%) Fee.7 64.390 3.440 91.4 50.2 16.211.1 FY10E 75.252 1.3 344.902 39.5 68.180 1.191 75.5 (Rs.8 79.794 1.6 10.142 38. liab Total Liabilities Equity Total Liab & Equity FY08 101.216.4 32.0 25.111 74.0 25.
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