INSTITUTIONAL EQUITY RESEARCH

HDFC Bank (HDFCB IN)

Analyst Day: Key takeaway
18 September 2023
INDIA | BANKING | Company Update
HDFC Bank hosted analyst day on 18th Sep 2023 to discuss merger accounting. Some of the BUY (Maintain)
key takeaways from the meeting CMP RS 1,630
TARGET RS 1,880 (+15%)
HDFC Ltd Networth adjusted down by 17%... Adjusted net worth of HDFC limited as of 1st
SEBI CATEGORY: LARGE CAP
July declined by 17% since March’23 impacted by
• Alignment to IGAAP (Impact 9% of Networth): Bank adjusted valuation of Investments COMPANY DATA
from “Fair value methodology” to “at Cost”, Upfronting cost of acquisition and Fees etc. O/S SHARES (MN) : 7,576
• Harmonization of Credit Policy (Impact 6% of Networth) a) Increase in specific provisions MARKET CAP (RSBN) : 12,589
MARKET CAP (USDBN) : 151.3
due to change in provisioning methodology to align with RBI guidelines (increasing 52 - WK HI/LO (RS) : 1,758 / 1,365
coverage ratio) vs Expected loss method under INDAS and b) Increase in general and LIQUIDITY 3M (USDMN) : 390
PAR VALUE (RS) : 1
contingent provision based on Banks assessment of portfolio
• Creation of Deferred tax Liability (Impact 4% of Networth) Due to differential tax SHARE HOLDING PATTERN, %
treatment for profits from mortgage e-HDFC Limited had created a reserve, however Jun 23 Mar 23 Dec 22
bank had to create a deferred tax liability according to RBI guidelines PROMOTERS : 20.8 20.9 20.9
DII : 22.0 23.0 23.1
• Interim Dividend Payout: (Impact 6% of Networth): Interim dividend paid out by eHDFC
FII : 45.6 44.7 44.6
prior to effective date OTHERS : 11.6 11.4 11.4
• Profits for 1QFY24 and Tax effect of harmonization positively impacted Networth by c.6%
PRICE PERFORMANCE, %
…Merged entity Networth as a result is 9% lower than our estimate. BVPS for merged entity 1MTH 3MTH 1YR
ABS 3.2 5.0 9.3
post above adjustment as of 1st July 2023 was Rs 536 lower than our earlier estimate of Rs
REL TO BSE (0.6) (2.8) (3.9)
590.
PRICE VS SENSEX
GNPA increased by 20bps: As of 1st July 2023, GNPA increased by c.20bps to 1.4% on merged
basis primarily impacted by higher GNPA for e-HDFCL Non-Individual. The harmonization of 180

NPA rule at bank level resulted into increase in e-HDFCL Non-individual to 6.7% vs 3.7% at the 160

end of March 2023. 140

120
NIM impacted by excess Liquidity: NIM for e-HDFC Ltd declined by c.20bs to 2.7% in 1QFY24 100
impacted by higher liquidity and higher NPAs, However NIM at day 0, declined by another
80
70bps due to excess liquidity. Management indicated that on merged basis impact of excess Sep-20 Sep-21 Sep-22 Sep-23
liquidity to be around 25-30bps and it may take 2-3 qtrs for NIMs to return back to normal as HDFCB IN BSE Sensex

excess liquidity gets deployed.

KEY FINANCIALS
Retail Deposit to be key focus: Management indicated their continued focus on retail deposit Rs bn FY23 FY24E FY25E
given lower run-offs vs wholesale deposits and lower LCR requirement. Net Profit (Rs) 441 591 766
% growth 19.3 34.1 29.6
RoA/RoE declines marginally on merged basis: RoA for e-HDFC Ltd reduced by c.50bps under EPS (Rs) 79 78 101
ABVPS (Rs) 502.1 548.8 627.2
Proforma IGAAP (vs INDAS), this was largely due to a) Upfronting of acquisition cost leading
ROA (%) 2.0 1.8 1.9
to higher cost to income and absence of HDFC Bank’s dividend income. On merged basis HDFC
ROE (%) 17 14 15
Bank’s ROA declines by c. 10-20bps for 1FY24
PER 20.6 20.8 16.1
P/ABV 3.0 2.7 2.4
Outlook and valuation: Merger strategically fit HDFC Bank’s product basket. As the benefits
accrue over a period, the intermittent period will see merger-related costs in the form of
pressure on margins and cost to income ratio. The return on equity is expected to moderate in Manish Agarwalla, Research Analyst
near terms owing to low leverage of the parent, however we expect RoA to sustain at 1.8-1.9% magarwalla@phillipcapital.in
level. We remain constructive from medium to long term perspective. We have cut our estimate Sujal Kumar, Research Analyst
for FY24E/25E owing to re-statement of opening networth and NIM compression due to excess sukumar@phillipcapital.in
liquidity (please refer to table below for details). At CMP, the core book trades at 2.7x/2.4x
FY24e/25e ABVPS of Rs 549/627, thus valuing the subsidiary at Rs 156 per share. We maintain
Buy with a revised target of Rs 1880 (Rs 1960 earlier) which is 2.75x FY25 ABVPS.

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research
is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt
Securities Inc, an SEC registered and FINRA-member broker-dealer. Powered by EQUITEC
 HDFC BANK COMPANY UPDATE

KEY IMPORTANT TREND

e-HDFC Limited net worth movement

Source: Investor Presentation

Opening merged net worth – 1 st July 2023

Source: Investor Presentation

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 HDFC BANK COMPANY UPDATE

Asset Quality Key Ratios: Merged HDFC Bank

Source: Company Data, PhillipCapital India Research Source: Company Data, PhillipCapital India Research

SOTP
Stake Per share valuation Criteria
Parent 639 FY25E Adj book value
less: Investment in subsidiary 12 per share investment in subsidiary
core book value 627
Bank Valuation – A 1725 2.75x FY25E core adj. book
Subsidiary
HDB Financial 95 46 2.5x FY25E adj net worth of Rs146bn, valuing entity at Rs 366bn
HDFC Securities 96 18 15x FY25E PAT of Rs9.4bn, valuing entity at Rs 141bn
HDFC AMC 53 27 Current market capitalisation
HDFC Ergo General Insurance 50 14 25x FY25E PAT of Rs8.4bn
HDFC Standard Life Insurance 48 73 Current market capitalisation
Total 177
Holding company discount (20%) 23
Total subsidiary value – B 154
Total value of the entity - (A+B) 1880
Source: Company, PhillipCapital India Research

Revised estimates Revised Earlier % revision

FY24e FY25e FY24e FY25e FY24e FY25e
NII 1195 1471 1295 1530 -7.7 -3.9
PPP 1024 1290 1128 1354 -9.2 -4.7
core PAT 591 766 669 814 -11.6 -5.9
EPS, Rs 78 101 89 109 -12.5 -6.8
BVPS, Rs 564 643 624 710 -9.6 -9.5
ABVPS, Rs 549 627 607 693 -9.6 -9.5
NIMs, % 3.7 3.6 4 4 (24bps) (3bps)
RoA, % 1.8 1.9 2 2 (21bps) (6bps)
RoE, % 14.4 14.9 16 15 (112bps) 30bps

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 HDFC BANK COMPANY UPDATE

Deposit mix Strong Business Momentum

CASA Domestic Retail Deposit Deposit growth Credit growth
90% 81% 83%
80%
77% 77% 30%
80%
70% 25%
60%
48% 20%
50% 46% 44%
42% 42%
15%
40%
30% 10%
20% 5%
10%
0%
0% FY19 FY20 FY21 FY22 FY23
FY19 FY20 FY21 FY22 FY23
Source: Company Data, PhillipCapital India Research Source: Company Data, PhillipCapital India Research

Presence and customer

FY19 FY20 FY21 FY22 FY23
Branch 5103 5416 5608 6342 7821
ATM 12635 13160 14901 16087 18130
Customer (mn) 49 56 60 71 83
Source: Company Data, PhillipCapital India Research

Margin driver
NIM Cost of Deposit Yield on fund
9%
7.6% 7.9%
8% 7.0%
7%
6%
5% 4.1% 4.2% 4.1%
4.0% 3.8%
4% 3.6%

3%
2%
1%
0%
FY21 FY22 FY23
Source: Company Data, PhillipCapital India Research

Priority sector loan (% to previous year loan book)

FY19 FY20 FY21 FY22 FY23
PSL bought (net) 5% 6% 8% 9% 5%
Bonds of NABARD/SIDBI/NHB 2% 1% 1% 4% 7%
Priority sector loan 34% 32% 25% 35% 40%
Total 41% 39% 35% 49% 52%
Source: Company Data, PhillipCapital India Research

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 HDFC BANK COMPANY UPDATE

Loan book break up

Retail % Agri % Industry % Services %

120%

100%
32% 29% 32% 33% 33%
80%

60%
28% 32% 29% 31% 29%
40%
10% 11% 8% 8% 9%
20%
29% 29% 31% 29% 29%
0%
FY19 FY20 FY21 FY22 FY23

Source: Company Data, PhillipCapital India Research

Standard Restructured loan

% to loan FY19 FY20 FY21 FY22 FY23
standard restructured loan 0.0% 0.0% 0.0% 0.0% 0.0%
Restructured loan under MSME Sector (Jan 2019 guideline) 0.0% 0.0% 0.3% 0.5% 0.3%
Restructured under covid framework 1.0 & 2.0 0.0% 0.0% 0.6% 1.0% 0.3%
Total standard restructured loan 0.0% 0.0% 0.9% 1.5% 0.6%
Contingent & floating provision 0.2% 0.4% 0.7% 0.8% 0.7%
Source: Company Data, PhillipCapital India Research

GNPA movement Sectoral NPA

Addition Recovery+upgrade write-offs Closing FY19 FY20 FY21 FY22 FY23
3%
2.1%

5%
1.9%

1.9%

5%
3.6%

2%
1.7%

4%
1.5%

1.31%
1.4%

1.3%

4%
1.3%

1.2%

2%
1.1%

3%
0.97%

0.87%
0.9%

0.80%
0.9%

3%
0.8%

0.7%

1%
0.6%

2%
0.41%

1.0%

0.9%

2%
0.7%

1% 1%
1%
0% 0%
FY19 FY20 FY21 FY22 FY23 Retail Agri Industry Services

Source: Company Data, PhillipCapital India Research Source: Company Data, PhillipCapital India Research

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 HDFC BANK COMPANY UPDATE

Business Concentration
FY19 FY20 FY21 FY22 FY23

16
13.8 13.9
14 12.9
11.6
12 10.6
10
8
6.1
6 4.5
4.0 4.1 3.9
4
2
0
% of deposit of 20 largest depositors % of advances of 20 largest borrower

Source: Company Data, PhillipCapital India Research

Third Party Fee

FY19 FY20 FY21 FY22 FY23
Rs bn 22 28 36 44 55
% of total fee 16% 17% 22% 23% 23%
Life insurance premium mobilised, Rs bn 42 46 59 68 87
Non-life insurance premium mobilised, Rs bn 23 24 22 23 24
Mutual fund AUM, Rs bn na na 754 925 1017
Source: PhillipCapital India Research, Company Data

Credit card business

FY19 FY20 FY21 FY22 FY23
Credit card outstanding, mn 12.49 14.5 14.9 16.5 17.5
% growth 17% 16% 3% 11% 6%
Credit card spends, Rs bn 1704 1594 1956 2570 4008
% growth 29% -6% 23% 31% 56%
Spend Market share 28% 22% 31% 26% 28%
Spend per card, (Rs 000) 136 110 131 156 229
% growth 10% -19% 19% 19% 47%
Source: Company Data, PhillipCapital India Research

Capital Adequacy
CET1 Tier 1 Tier II RWA to loan book (RHS)
20% 115%
18%
16% 110%
14%
12% 105%
10%
8% 100%
6%
4% 95%
2%
0% 90%
FY19 FY20 FY21 FY22 FY23

Source: Company Data, PhillipCapital India Research

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 HDFC BANK COMPANY UPDATE

Financials
Income Statement Valuation Ratios
Y/E Mar, Rs bn FY22 FY23 FY24E FY25E FY22 FY23 FY24E FY25E
Interest on Loans 985 1,271 2,015 2,478 Earnings and Valuation Ratios
Interest on Investments 260 313 415 510 Pre-provision Operating RoAE (%) 28.9 27.1 24.9 25.1
Others 32 32 60 74 RoAE (%) 16.7 17.0 14.4 14.9
Total Interest Earned 1,278 1,616 2,490 3,063 Pre-provision Operating ROA (%) 3.4 3.1 3.0 3.0
Total Interest Expended 557 747 1,295 1,592 RoAB (%) 2.0 2.0 1.8 1.9
Net Interest Income 720 868 1,195 1,471 EPS (Rs.) 66.7 79.1 78.3 101.3
Total non-interest income 295 312 429 491 Dividend per share (Rs.) 15.5 19.0 18.0 21.5
Total Income 1,015 1,181 1,624 1,962 Book Value (Rs.) 433.0 502.2 563.7 642.8
Personnel Expenses 120 155 190 201 Adj BV (Rs.) 427.2 502.1 548.8 627.2
Other Expenses 254 321 410 471
Total Op expenses 374 477 600 672 Revenue Analysis
Net Inc (Loss) before prov 641 704 1,024 1,290 Interest income on IBA (%) 6.9 7.5 7.7 7.5
Provision for NPAs 151 119 164 195 Interest cost on IBL (%) 3.5 3.9 4.5 4.4
Net Inc (Loss) before tax 490 585 860 1,094 NIM on IBA / AWF (%) 3.9 4.0 3.7 3.6
Provision for Income Tax 121 144 268 328 Core fee Inc / AWF (%) 1.3 1.3 1.1 1.0
Net Profit 370 441 591 766 Portfolio gains / Total Inc (%) 2.3 1.0 1.9 1.8
Op.Exp / TI (%) 37.7 40.8 37.7 34.9
Balance Sheet Op.Exp / AWF (%) 2.0 2.2 1.8 1.7
Y/E Mar, Rs bn FY22 FY23 FY24E FY25E Employee exps / Op exps (%) 32.1 32.6 31.7 29.8
Assets Tax / Pre-tax earnings (%) 24.6 24.6 31.2 30.0
Cash & Bal with RBI 223 766 530 583
Loans, Adv&Int accrued 13,688 16,006 24,875 28,611 Asset Quality
Investments 4,555 5,170 7,613 8,827 GNPAs / Gr Adv (%) 1.2 1.1 1.4 1.5
Fixed Assets (Net) 61 80 105 121 NNPAs / Net Adv (%) 0.3 0.3 0.4 0.4
Other assets 858 1,467 2,025 2,238
Total Assets 20,685 24,661 36,469 41,834 Growth Ratio
Loans (%) 20.8 16.9 55.4 15.0
Liabilities Investments (%) 2.7 13.5 47.2 15.9
Share capital 6 6 8 8 Deposits (%) 16.8 20.8 22.7 22.2
Reserves and Surplus 2,395 2,796 4,248 4,852 Networth (%) 17.9 16.7 51.9 14.2
Borrowing 1,848 2,068 7,556 6,915 Net Int Income (%) 11.0 20.6 37.5 23.1
Total Deposits 15,592 18,834 23,115 28,246 Non-fund based income (%) 17.1 5.8 37.6 14.3
Other liab incld. prov 844 957 1,543 1,814 Non-IntExp (%) 14.4 27.3 26.0 11.9
Total Liabilities 20,685 24,661 36,469 41,834 Profit Before Tax (%) 17.7 19.3 47.0 27.3
Net profit (%) 18.8 19.3 34.1 29.6

Asset / Liability Profile

Avg CASA/ Deposits (%) 47.0 45.9 38.5 35.5
AvgAdv / Avg Dep (%) 85.0 84.8 102.8 107.6
AvgInvst / AvgDep (%) 31.8 29.0 30.7 32.2
IncrAdv / Deposits (%) 105.0 70.7 206.7 72.7
Avg Cash / AvgDep (%) 9.3 10.0 8.4 7.1

Capital Adequacy Ratio:

CRAR 18.9 19.3 20.0 19.7
Tier I (%) 17.9 17.1 18.0 17.6
CET 1 (%) 16.7 16.4 17.3 16.7
NNPAs to Equity (%) 1.8 1.6 2.5 2.3
Source: Company, PhillipCapital India Research

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