BUY

Target Price: 1233

CMP (Rs) as of (Apr 29, 2020) 977
Upside /Downside (%) 26%
Axis Securities - Equity Research
High/Low (Rs) 1304/738

HDFC Bank
Market cap (Cr) Rs 5,35,718
(HDFCB IN) Avg. daily vol. (6m) Shrs. 61,43,469
No. of shares (Cr) 548.3
BFSI | Initiating Coverage |

We are initiating coverage on HDFC bank (HDFCB) with a Buy rating and
Price Target of Rs 1,233 (SOTP basis) which implies an upside of 26% from
the current levels. Our key reasons being 1) Amongst the best liability Shareholding (%)
franchise/asset book which will help in consistent market share gains. 2) Sep-19 Dec-19 Mar-20
Proactive provisioning provides cushion for the COVID19 related stress. Promoter 21.3 21.3 21.2
Asset quality looks manageable with risks in the unsecured, MSME and FIIs 30.6 30.8 29.8
corporate books reined in. 3) Investments in digital strategy resulting in MFs / UTI 11.7 11.7 12.2
consistent cost rationalisation. Considering its stable margins, healthy Banks / FIs 0.1 0.1 0.1
asset quality, consistent performance and superior management, it is well Others 36.4 36.2 36.7
placed to outperform its peers.
OUR INVESTMENT THESIS IS BASED ON THE FOLLOWING PREMISES:
Quality bank to gain market share Financial & Valuations
Competitive environment remains weak due to Covid 19, which should enable Y/E Mar (Rs. bn) 2020P 2021E 2022E
HDFCB to make continued market share gains. Recent episodes with Yes/PMC NII 561.9 663.2 773.5
bank further imply that savers are more comfortable choosing larger banks like PPOP 487.5 570.4 673.5
HDFCB. We expect bank’s loan growth to be slower compared to historical Net Profit 262.6 292.9 381.3
growth at 14/18% in FY21/22E especially in the retail book because of Covid EPS (Rs.) 47.9 53.4 69.5

impact but should beat system growth. ABV 298 336 394
P/ABV 3.27 2.91 2.48
Operating leverage to continue with digital strategy paying off
ROAA 1.89 1.81 2.07
HDFCB has channeled its digital abilities to reduce involvement of manpower in NNPA (%) 0.36 0.53 0.35
routine process-driven operations, with an aim to enable employees to focus
more on business generation. Over the past ten years, the C-I ratio has
improved by 900bp to 39.6% and the cost-asset ratio by 60bp to 2.2%. Key Drivers (%)
Asset quality risk manageable Y/E Mar 2020 2021E 2022E
HDFCB has been increasing its provisioning over the past few quarters in FY20 NIM 4.25 4.29 4.36
as a pre-emptive measure against macro slowdown. We believe the higher C-I 39.6 39.1 38.0
provisioning buffer would certainly help cushion the NPA impact due to Covid 19 CASA 42.2 42.3 43.2
situation and expect asset quality in the unsecured segment and corporate
portfolio to be manageable. Overall GNPA ratio to be in the range 1.4-1.9%.
Axis vs Consensus
Management transition remains an overhang
EPS Estimates FY20E FY21E FY22E
The bank board has finalized 3 candidates (2 internal/1 external) for MD & CEO
position due to be vacated by October 2020. Any clarity from the RBI should Axis 47.9 53.4 69.5

emerge around July/August 2020 and will be keenly watched out for. Consensus 51.4 63.7 80.9

RESILIENCE TO BOUNCE BACK; INITIATE WITH BUY Mean Consensus TP (12M) 1201.1

As macro concerns loom large on Covid-19 headwind, we expect loan growth

at ~14/18% in FY21/FY22E with retail book slowdown, slower fee income Relative performance
growth, higher provisioning but partly offset by cost rationalization (C-I 150
improvement of 160bps). Prov/Avg. Advances will go up to 1.5% in FY21 but 125
normalize to 1.2% in FY22E. We expect HDFCB to report lower ROAA/ROAE at
100
1.8%/16% in FY21, but normalize to 1.9%/17% by FY22E. Given its superior
75
business model, bank’s resilience across cycles will play out positively. We
50
initiate with BUY with target price of Rs 1,233 derived using the SOTP method
Jan-18 Jun-18 Nov-18 May-19 Oct-19 Apr-20
(core bank at 3xFY22 ABV + Subsidiaries value Rs 50/-). HDFC Bank Ltd BSE Sensex

KEY FINANCIALS (STANDALONE) Source: Captaline, Axis Securities

(Rs. bn) FY19 FY20P FY21E FY22E
NII 482.4 561.9 663.2 773.5
PPOP 397.5 487.5 570.4 673.5 Siji Philip
Net Profit 210.8 262.6 292.9 381.3 Sr. Research Analyst
EPS (Rs.) 38.7 47.9 53.4 69.5 : (022) 4267 1738
ABV 261 298 336 394 : siji.philipi@axissecurities.in
P/ABV 3.74 3.27 2.91 2.48
ROAA 1.83 1.89 1.81 2.07
NNPA (%) 0.39 0.36 0.53 0.35
Source: Company, Axis Research

Axis Securities 30th Apr 2020

HDFC Bank

A DECADE IN CHARTS: CONSISTENT PERFORMANCE

Loan CAGR at 23% over FY10-FY20
30 12,000
8,194 9,937
25 10,000
6,583
20 8,000
5,546
15 6,000
4,646
3,655
10 3,030 4,000
2,397
1,600 1,954
5 1,258 2,000

0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P
Loan (Rs bn) YoY growth (LHS)

Source: Company, Axis Securities

NIM at +4% ; CASA +40%
60 4.7

50 4.6
4.5
40
4.4
30
4.3
20
4.2
10 4.1
52 47 45 44 43 48 43 42 42 42 43
0 4.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P
CASA (%) NIM % (RHS)

Source: Company, Axis Securities

Asset Quality maintained
1.6 1.4 1.4
1.3 1.3
1.4
1.2 1.1 1.0 1.1
1.0 1.0 0.9 0.9
1.0
0.8
0.6 0.4 0.4
0.3 0.3 0.4
0.4 0.3 0.2 0.3
0.2 0.2 0.2
0.2
0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P
GNPA (%) NNPA (%)

Source: Company, Axis Securities

ROAA & ROAE best in class
22 1.9 1.9 2.0
1.9
1.8 1.8
1.8 1.8 1.8
20 1.7 21.3 1.8
20.3
18 19.4
1.5 1.6
18.7 18.3 17.9 1.6
17.9
16 16.7 16.5 16.4
1.4
14 16.3

12 1.2
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P

ROAE (%) (RHS) ROAA (%)

Source: Company, Axis Securities

Axis Securities 2
HDFC Bank

KEY INVESTMENT ARGUMENTS

Market share gains expected to continue
Over FY10-FY20, HDFCB loan book has grown at a CAGR of 23%. During this period, it has
steadily grown its loans/deposits market share to ~9.6%/ 8.5% of the system from ~3.9/3.7%,
driven by steady branch addition (up ~3x from 1,725 in FY10 to 5,130 in FY20), improving
employee productivity (business/employee up ~4x), and effective use of technology to gain
distribution efficiency (cost-to-income ratio decreased ~900bp to 39.6%).

Exhibit 1: HDFCB consistently improving credit/deposit market share

12.0
9.6
10.0
8.4 8.5
7.6 7.3
8.0 7.0 6.9
6.4 6.0
5.6 5.3 5.9
6.0 5.0 4.8
4.2 4.2 4.6 4.4
3.9 3.7 4.1 4.0
4.0

2.0

0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P

Credit market share (%) Deposit market share (%)

Source: RBI, Company, Axis Securities

At ~6%, credit growth in the system for March 2020 is at a multi-decade low. HDFCB has
consistently outdone the system credit growth and grew at 21% for FY20 largely led by corporate
banking (+29% YoY), while retail loan growth was soft at 15% YoY largely a result of greater draw-
downs by highly-rated entities and an increased demand for working capital from these entities.
Exhibit 2: Advances growth superior to system credit growth

30.0 27.3 27.1 26.4 27.1

24.5
25.0 22.7
22.2 21.3
21.5 20.6
19.4 18.7
20.0
17.0
13.5 14.1 14.3
15.0 12.9
10.9
9.2 9.8
10.0 8.3
6.2
5.0

0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P
System Credit growth (%) HDFCB Loan growth (%)

Source: RBI, Company, Axis Securities

We expect that HDFCB will continue to gain from the flight to safety sentiment especially through
corporate and PSU liabilities and this should aid the asset side as well. We believe its loan book
quality across segments is significantly stronger than the rest of the industry, which should hold it in
comparatively better stead. We expect loan growth in FY21/22E to taper down to 14/18%, impacted
by slower growth in retail book amidst Covid 19 led disruption though it should still be better than
the overall system growth.

Axis Securities 3
HDFC Bank

Well positioned to mitigate risk across business segments; Retail book to be under
pressure in near-term
Instead of just eating up into the market share from other banks, mainly PSU banks, HDFCB has
been able to expand the credit pie, with expansion of its network in sub-urban/rural geographies.
This has helped the bank in maintaining uniform growth across its retail and wholesale segments.
Maintaining the loan book skewed towards retail has helped the bank to maintain its NIMs at +4%
and also sustain its pristine asset quality.

Exhibit 3: Retail/Wholesale mix skewed towards retail

60 55 57 55
53 52 51 49 53 51
49 51 47 48 47 49
50 45 43 45

40

30

20

10

0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P

Retail Corporate

Source: Company, Axis Securities

Exhibit 4: Retail loan book breakup (%)

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P
Auto Loans 25 23 22 23 22 22 21 19 17
CV's 12 12 10 7 7 7 6 7 6
2 Wheelers 2 2 2 2 2 2 2 2 2
Personal Loans 13 13 14 15 17 18 20 22 23
Business Banking 17 18 17 11 11 13 15 13 13
Loans against securities 1 1 1 1 1 1 1 0 0
Credit Cards 6 7 8 9 9 9 10 11 12
Home 13 12 13 14 14 14 10 12 13
Others 7 4 4 5 5 4 4 4 4
Gold 3 4 3 2 2 2 1 1 1
Kisan Gold - 4 7 9 10 10 10 9 9
Source: Company, Axis Securities

Concerns on unsecured and wholesale business addressed

Of the total unsecured loans (16% of total loans), 75-80% is to salaried customers who work with
corporates rated A and above. The bank has already tightened its lending norms in retail, resulting
in higher rejection rates (up 25% over last 2 months). NPA in unsecured segment (1.3% as of
FY19) is largely in line with overall NPA.

HDFCB is the market leader (27% share) in the credit cards business, initially offering it only to its
bank customers. Currently more than 60% of credit card loans are disbursed to existing customers
with a strong credit history keeping delinquencies low.

Its SME exposure (~6% of loans) is well diversified with ~2% NPA. It caters to niche segments
confined to Top 3 SMEs in a particular region based on product portfolio. Around 80% of SMEs
have additional collateral where cash flows are normal currently and ~85% is self-funded which
mitigate the risks in this segment. Average ticket size in SME is ~Rs 12 mn. Moreover, ~80% of the
bank’s wholesale lending is to AA and above and the exposure is spread over 150 sectors.
Management highlighted leeway to increase working capital limits wherever necessary.

Axis Securities 4
HDFC Bank

Benign funding costs and time-tested growth strategy will help maintain stable margins
HDFCB has judiciously shaped its asset growth strategy in sync with the built up of its liability
portfolio. Strong liability franchise has helped insulate HDFCB from margin pressures. Yields have
been down but so have funding costs and hence NIMs are likely to steady. LCR in Q4FY20
increased to 132% with bank maintaining excess liquidity of Rs500bn, which led to an additional
liquidity-related drag of ~10bps on NIM. Management expects margins to remain within the 4.1-
4.5% range, given the loan mix between wholesale and retail remains ~50:50. We expect margin
to be stable at 4.3/4.4 over FY21/FY22 though there could marginal pressure due to higher
liquidity and loan mix derisking

Exhibit 5: NIM to remain in stable range

14 7.0
12
6.0
10
8 5.0

6 4.5 4.6 4.0

4.4 4.5 4.4 4.4 4.4 4.4 4.4 4.4 4.4
4.3 4.3
4
3.0
2
0 2.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

Yield on Advances (RHS) Cost of Deposits NIM

Source: Company, Axis Securities

Exhibit 6: CASA share to improve

60
52.0 52.7
48.4 47.4 48.0
50 44.8 44.0 43.2 43.5 43.2
42.4 42.2 42.3
40

30

20

10

0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

CASA (%) CA (%) SA (%)

Source: Company, Axis Securities

Axis Securities 5
HDFC Bank

Well diversified fee income profile will face pressure on Covid 19 disruption
HDFCB has built a strong and well-diversified fee income profile over the years. Fee income forms
~1.2% of average assets. 93% of fee income is from retail segment. 30-35% of fee income is from
Payments business, 30-35% is Core fee, 15-20% is Third party distribution and the balance is
wholesale fees. Higher Debit card and credit spends have led to strong growth in fess from
payments business.

Bancassurance income from HDFC Standard Life Insurance forms more than 1/3rd of HDFCB’s
third-party distribution fees. HDFCB continues to command >70% of total commissions paid by
HDFC Life, which, coupled with strong new business growth trend for HDFC Life provides visibility
of robust fee income from this channel. However, with retail loan book growth likely to be muted
and lower card spends in the current economic environment, we expect fee income outlook to be
muted in FY21/22E, marginally lower at 1.13-1.15% of assets.

Exhibit 7: Fee income under pressure as retail book slows down

2.0 1.9 1.9 1.9

1.7 1.8
1.8 1.7 1.7
1.6 1.6 1.6 1.6
1.5 1.5
1.6

1.4
1.4 1.4 1.4 1.4
1.2
1.3
1.2 1.2 1.2 1.2
1.0 1.2 1.1 1.2
1.1
0.8
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

Fee Income (% to avg. assets) Other Income (% to avg. assets)

Source: Company, Axis Securities

Exhibit 8: Fee income/Non-interest income to avg. assets to come down by 10bps in FY21E

2.0 1.9 1.9 1.9

1.7 1.8
1.8 1.7 1.7
1.6 1.6 1.6 1.6
1.5 1.5
1.6

1.4
1.4 1.4 1.4 1.4
1.2
1.3
1.2 1.2 1.2 1.2
1.0 1.2 1.1 1.2
1.1
0.8
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

Fee Income (% to avg. assets) Other Income (% to avg. assets)

Source: Company, Axis Securities

Axis Securities 6
HDFC Bank

Operating leverage to sustain; further digitization to aid further cost rationalization

The bank’s liability is largely retail (~75%) and it continued to gain share in Q4FY20 as well. On
wholesale liabilities, deposits are largely corporate with littler reliance on government deposits. While
growth may slow down in near term, it has already made investments in digital, franchise and has ~6
mn customers. In a slower growth environment, it has the flexibility to reduce costs to aid
profitability.

HDFCB has used digital as a tool to grow business. Within retail, wherein, almost half of its
Personal Loans (PL) is sourced digitally, around one-third of auto loans are digital and are
originated straight through processing. Similarly, Loan against Securities (LAS) and two-wheelers
are also largely digital. In recent times, it has gained a lot of corporate market share and use APIs
to be digitally connected with its customers. These digital initiatives should support business growth
given the lack of physical connect amidst Covid-19 disruption.

The bank has channeled its digital abilities to reduce involvement of manpower in routine, process-
driven operations, with an aim to enable employees to focus more on business generation. Over
the past ten years, the C-I ratio has improved by 900bp to 39.6%, and the cost-asset ratio by 60bp
to 2.2%. We expect continued operating leverage improvement (38% cost-income by FY22E),
led by controlled employee/network growth, further improvement in branch productivity and
lower operating expenses due to increasing usage of technology.

Exhibit 9: Cost rationalization to aid C-I/C-AA improvement

3.5 60.0
48.6 49.2 49.9
47.9
3.0 45.8 45.4 45.2 44.5 50.0
41.7 39.9
3.0 3.0 39.6 39.1 38.0
2.5 2.8 2.9 40.0
2.7
2.6 2.6 2.5
2.0 2.4 2.3 30.0
2.2 2.2 2.2
1.5 20.0

1.0 10.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

C-AA (%) (RHS) C-I (%)

Source: Company, Axis Securities

Exhibit 10: Productivity parameters on up-tick with push on digitization

250 3.5
232
208 3.0
200 186
3.0
163 2.5
150 2.5
150 2.0
131 2.3
104 2.0
97 1.8 1.5
100 88
61 71 1.6
52 59 1.3 1.0
1.1 1.2
50
0.9 0.5
0.6 0.7
0.5
0 0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

Avg Businss per employee (Rs mn) Avg Profit per employee (Rs mn) (RHS)

Source: Company, Axis Securities

Axis Securities 7
HDFC Bank

Asset quality to be largely stable though marginal uptick in FY21 expected

HDFCB has been increasing its provisioning over the past few quarters in FY20 as a pre-emptive
measure against macro slowdown. While the covid-19 outbreak and its economic impact is
unknowable currently due to lockdown uncertainty, we believe the higher provisioning buffer would
certainly help cushion the NPA impact going forward. Post setting aside Rs15.5bn during Q4FY20,
contingent provisions outstanding now stand at ~Rs30bn, up nearly 100% since last year. Stepping
up provisions in anticipation of stress and using higher profitability to accelerate provisioning has
been generally followed by the bank.

HDFCB highlighted that the delinquency trend in the unsecured portfolio remains well in control,
given that >60% of credit card loans and >50% of personal loans are disbursed to existing
customers with a strong credit history. HDFCB’s focus on extending these unsecured products
largely to salaried customers also helps it in maintaining healthy asset quality.

Exhibit 11: GNPA/NNPA (%) under pressure in FY21E; stable by FY22E

2.0 1.9 100

82.5 82.4 79.9
78.4 75.2
72.6 73.9 71.4 72.0
1.6 69.9 68.7 69.8 80

1.2 1.4 1.4 71.5 1.4 60

1.3 1.3
0.8 1.1 1.0 1.0 1.1 40
1.0 0.9 0.9 0.5
0.3 0.4 0.4 0.4 0.4
0.3 0.3 0.2 0.3
0.4 0.2 0.2 0.2 20

0.0 0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

GNPA (%) NNPA (%) PCR (%) (RHS)

Source: Company, Axis Securities

During the 2008-09 cycle, bank’s GNPAs crossed the 2% mark. In the current crisis, where cash
flows will be impacted quite substantially across the economy, we expect that NPAs will increase.
At the same time, the bank has been in the process of tightening credit filters across its segments.
Delinquency rates for the bank have been ~40% lower than the market, the reason for which can
be attributed to proprietary risk assessment and underwriting tools that rely less on bureau scores
and lay more emphasis on internally developed scorecards. We expect provisioning to average
advances to increase to 1.5% in FY21E with higher slippages (~2.3%) and GNPA at 1.9% on
account of Covid headwinds. However, we expect improvement in FY22 to come through
with prov/avg. advances at 1.2% and lower slippages at 1.8%.

Exhibit 12: Higher Provisioning/Slippages in FY21 amidst Covid crisis; normalize by FY22E
3.0 2.7
2.3 2.3
2.5 2.1
1.9 2.0
1.8
2.0 1.6 1.6 1.5 1.5
1.1
1.5 1.9
1.0 1.5
1.0 1.3
1.3 1.2
1.1 1.0 1.0
0.5 0.8
0.6 0.7 0.7
0.6
0.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

Provision (% of Avg. Advances) Slippage (%)

Source: Company, Axis Securities

Axis Securities 8
HDFC Bank

Improvement in RORWA underscores adequate pricing of risk; ROAA outlook robust

Owing to stronger growth in the unsecured portfolio, the bank’s RWA (risk-weighted assets) had
increased to 75% of total assets in FY19, indicating an increase in the risk profile. However, in FY20
while RWA came down to 65%, RORWA of the bank has improved by ~30bp to ~2.6% during the
same period. This indicates that profitability has improved on back of multiple levers viz. stable NIMs
and lower opex rather than simply taking on higher balance sheet risk and the bank is able to
adequately price the incremental risk it is taking via robust growth in the unsecured portfolio.

The delinquency trend in the unsecured portfolio also remains well in control, given that >60% of
credit card loans and >50% of personal loans are disbursed to existing customers with a strong
credit history. HDFCBK’s focus in extending these products largely to salaried customers also helps
it in maintaining healthy asset quality.

We expect ROAA to moderate to 1.8% in FY21 due to lower loan growth and higher
provisioning, partly offset by cost rationalization. In FY22E, pick up in loan growth, lower
provisioning coupled with cost savings should improve ROAA to +2%.

Exhibit 13: ROAA/ROAE bounce back in FY22E

22.0 21.3 18.2 2.2

20.3 19.4 18.3 16.4
17.9 17.9 16.5
20.0 18.7 16.1 2.0

18.0 16.3 16.7 1.9 1.8

1.8 2.1
16.0 1.9 1.6
1.7 1.8
1.8 1.8 1.8
14.0 1.6 1.4
1.5 1.8 1.9
12.0 1.2

10.0 1.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20P FY21E FY22E

ROAA (%) ROAE (%)

Source: Company, Axis Securities

Subsidiaries are gaining scale; expect growth momentum to continue, albeit hiccup in
FY21

Both HDB Financials and HDFC Securities have grown robustly over the last three years. While
HDB Financials reached AUM of ~Rs 580bn by FY20, HDFC Securities recorded ~20% PAT CAGR
over last five years. Both HDFC Sec and HDB have strong ROEs at +29% and +17% respectively.
While we expect FY21E to be muted for HDB with the growth in the first half to be impacted by the
Covid 19, pick-up should happen by FY22E. Extension in lockdown poses considerable growth risk.
We expect both the subsidiaries to recover by FY22 and maintain strong growth trajectory over the
next few years. At 10x FY22E earnings for HDFC Securities and 2x FY22E BV for HDB Financials,
the two subsidiaries together would add Rs 50 to our TP, post hold-co discount of 20%.

Axis Securities 9
HDFC Bank

VALUATIONS AND OUTLOOK

In a slow credit environment amidst Covid 19 disruption and on a high asset base, HDFCB can
continue to improve its credit market share in a ‘flight to safety’ sentiment. HDFCB has continuously
used digitization to reduce operating expenses and increase cross-sell of fee products, helping
improve operating leverage and ROAA/ROAE. Continued digital initiatives are expected to drive
further improvement in operating leverage and help improve profitability as the bank focuses on
protecting its balance sheet.
We expect HDFCB to record 16% loan book CAGR and 21% PAT CAGR over FY20-22E, with
ROAA/ROAE of 2.1/18.2% in FY22E. NIMs are expected to improve 10bps to 4.36% as funding
costs remain benign for the bank. While fee income growth could be under pressure in the near-term
the strong control on operating leverage will continue driving a steady improvement in the return
ratios (18bp improvement in ROAA over FY20-22E).
The bank has shortlisted two internal and one external candidate. However, till its leadership is
finalized, overhang on the stock would remain despite strong earnings and outlook. The bank
continues to remain a portfolio stock and maintains premium valuations.

We arrive at a target price of Rs 1,233 (3x FY22E core ABV and Rs 50 for subsidiaries post
hold co. discount). We INITIATE on HDFCB with a BUY rating.

SOTP Table
Holding Valuation Methodology Value
(%) Per Share
HDFC Bank – Parent 100.0% 3x FY22E BV 1,182
HDB Financial Services 95.9% 2.0x FY22E BV 46
HDFC Securities 97.9% 10x FY22E EPS 17
Less: Hold Co Discount @20% 13
Total 1,233

PRICE BAND CHARTS

HDFCB 12M Fwd PE Band HDFCB 1Y Fwd PE Chart
1600 40
1400
35
1200

1000
30

800 25
600
20
400
15
200

0 10
Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19
Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20
Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19
Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

Price 10x 15x 20x 25x PE Mean Mean+1Stdev Mean-1Stdev

Source: Company, Axis Securities

HDFCB 12M Fwd P/Adj BV Band HDFCB 1Y Fwd P/Adj BV Chart

5.5
1600
1400 5.0

1200 4.5
1000 4.0
800 3.5
600
3.0
400
2.5
200
2.0
0
Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20
Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19
Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19
Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

P/Adj BV Mean Mean+1Stdev Mean-1Stdev

Price 1x 2x 3x 4x

Source: Company, Axis Securities

Axis Securities 10
HDFC Bank

KEY RISKS

Slowdown in the retail segment

Given the weak economy outlook amidst the Covid 19 situation could affect loan growth for the
bank in the short to medium term. HDFCB’s loan portfolio broadly imitates India’s economy mix by
catering to the consumption theme. A slower-than expected pickup in India’s economic growth or a
slowdown in job creation could affect demand for retail loans and margins. Product-specific shocks
on the retail side could result in a negative surprise on credit costs.

Leadership risk
HDFCB will witness a change at the top after three decades, with MD & CEO Mr. Aditya Puri
retiring in October 2020. While we continue to believe that HDFCB’s process-driven business will
hold it in good stead, the stock could be negatively affected should there be a slew of senior
management exits during the transition phase.

ABOUT BANK

HDFCB is the amongst the largest private sector bank in India, with a market share of ~9.6% in
system loans as of FY20. It has a unique franchise in the banking sector, with a loan portfolio of ~Rs
9.9trn (as of March 2020), a strong national network of 5,130 branches spread across urban and
rural markets, a high-quality deposit franchise, well-diversified revenue mix, strong asset quality, and
consistent financial performance. The bank caters for the mass and affluent customers in deposit
and transactional banking services. It offers a wide range of products across its wholesale and retail
banking franchises. HDFCB is among the top three players in auto loans, personal loans,
commercial vehicles, cash management, and supply chain management. It originates home loans
on behalf of its parent, HDFC Ltd.

Axis Securities 11
HDFC Bank

FINANCIALS (STANDALONE)

INCOME STATEMENT (Rs bn)

FY19 FY20P FY21E FY22E
Net Interest Income 482 562 663 773
Other Income 176 233 260 298
Total Income 659 794 924 1,072
Total Operating Exp 261 307 353 398
PPOP 397 487 570 673
Provisions & Contingencies 76 121 164 144
PBT 322 366 407 530
Provision for Tax 111 103 114 148
PAT 211 263 293 381
Source: Company, Axis Securities

Balance Sheet (Rs bn)

FY19 FY20P FY21E FY22E
SOURCES OF FUNDS
Share Capital 5.4 5.5 5.5 5.5
Reserves 1,487 1,704 1,933 2,241
Shareholders' Funds 1,492 1,710 1,939 2,247
Total Deposits 9,231 11,475 12,759 14,973
Borrowings 1,171 1,446 1,552 1,724
Other Liabilities & Provisions 551 674 743 820
Total Liabilities 12,445 15,305 16,994 19,763

APPLICATION OF FUNDS
Cash & Bank Balance 813 866 678 674
Investments 2,906 3,918 4,316 4,946
Advances 8,194 9,937 11,355 13,430
Fixed Assets 40 44 49 54
Other Assets 492 539 595 659
Total Assets 12,445 15,305 16,994 19,763
Source: Company, Axis Securities

Axis Securities 12
HDFC Bank

Ratio Analysis (%)

FY19 FY20P FY21E FY22E
Valuation Ratios
EPS 38.7 47.9 53.4 69.5
Earnings Growth (%) 15% 24% 12% 30%
Adj. BVPS 261 298 336 394
ROAA (%) 1.83 1.89 1.81 2.07
ROAE (%) 16.5 16.4 16.1 18.2
P/E (x) 25.2 20.4 18.3 14.1
P/ABV (x) 3.7 3.3 2.9 2.5
Div Yield (%) 1.5 0.3 2.0 2.4
Profitability
Yield on Advances (%) 10.5 10.1 10.0 9.9
Yield on Investment (%) 7.5 6.0 5.9 5.8
Cost of Funds (%) 5.2 5.0 4.9 4.8
Cost of Deposits (%) 4.8 4.9 4.7 4.7
NIM (%) 4.39 4.25 4.29 4.36
Operating Efficiency
Cost/Avg. Asset Ratio (%) 2.3 2.2 2.2 2.2
Cost-Income Ratio (Excl Treasury) 39.9 39.6 39.1 38.0

Balance Sheet Structure Ratios

Loan Growth (%) 24.5 21.3 14.3 18.3
Deposit Growth (%) 17.0 24.3 11.2 17.3
C/D Ratio (%) 88.8 86.6 89.0 89.7
Equity/Assets (%) 12.0 11.2 11.4 11.4
Equity/Advances (%) 18.2 17.2 17.1 16.7
CASA (%) 42.4 42.2 42.3 43.2
Tier 1 CAR (%) 15.8 17.2 16.6 16.7
Asset Quality
Gross NPLs (Rs bn) 112.2 126.5 212.9 191.6
Net NPLs (Rs bn) 32.1 35.4 60.7 47.4
Gross NPLs (%) 1.37 1.27 1.87 1.43
Net NPLs (%) 0.39 0.36 0.53 0.35
Coverage Ratio (%) 71.4 72.0 71.5 75.2
Provisions/Avg. Adv(%) 1.02 1.34 1.54 1.16
ROAA TREE (%)
Net Interest Income 4.18 4.05 4.11 4.21
Non Interest Income 1.53 1.68 1.61 1.62
Operating Cost 2.26 2.21 2.19 2.17
Provisions 0.65 0.88 1.01 0.78
Tax 0.96 0.75 0.71 0.81
ROAA 1.83 1.89 1.81 2.07
Leverage (x) 9.0 8.7 8.9 8.8
ROAE 16.5 16.4 16.1 18.2
Source: Company, Axis Securities

Axis Securities 13
HDFC Bank

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the
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Axis Securities 14
HDFC Bank

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12-18 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%
NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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Axis Securities 15