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HDFCBank

nalyst:

andDama

and.dama@networthdirect.com

2230286391

te:8th

January,2010

Strong,consistentandresilientprivatebankingplayer:HDFC

bankis

one

of

the

best

banking

franchises

among

Indian

banks

with an unparalleled liability network, strong & consistent

financialperformanceandsoundriskmanagementsystemsin

placeresultinginbestassetqualityevenduringtryingtimes.

Growthsettoreturn,butwithquality: Weestimatebankto

deliver better than system credit expansion at about 24%

CAGR over FY0912E, 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,comfortandresilienceduringtoughtimes.

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(provisioncoverageatabove70%).

Return ratios to improve, but remain below historical

averages:BankhasregisteredaverageRoEofabout20%over

past10years,however,offlatehascomedowntoabout16%,

primarily impacted due to significant equity dilution post

merger.However,goingforward,weestimateRoEtoimprove

toabout18%byFY12E,asthebankproductivelydeploysthe

infusedcapital

and

earnings

gain

traction

with

29%CAGR

over

FY0912E.We expect improved NII and fee income

contributiontodriveRoAatabout1.7%byFY12E.

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.BVleavinglimitedupside.WevaluebankassigningaP/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,recommendanaccumulateratingonthestock.

Keyrisks:Higherdelinquenciesandslowerbranchexpansion

Rating Accumul

Target

Price

Rs19CMP Rs17

Upside 1

Sensex 17,1

KeyData

BloombergCode HDFCB

ReutersCode HDBK.

NSECode HDFCBA

CurrentShareo/s (mn) 42

MktCap(Rsbn/USDmn) 734.9/1608

52Wk

H/L

(Rs)

1839/7

DailyVol.(3MNSEAvg) 0.8

FaceValue(Rs)

Beta 0

1USD/INR 4

ShareholdingPattern

Promoters 2

FII 2

Others 4

PricePerformance(%)

1m 6m

HDFCB 8.1 3.5

NIFTY 3.9 5.6 8

Source:Bloomberg;*Ason7thJan,2010

INDIA

InstitutionalResearch

BANKING

InitiatingCovera

HDFCBank

Innateresilience;enduringgrowth

/EMar(Rsmn) NII YoY(%) NetIncome YoY(%) AdjPAT YoY(%) EPS(Rs) AdjBV(Rs) RoE(%) RoA(%) P/E(x) P/AB

Y08 52,279 50.7 75,110 50.7 15,902 39.3 44.9 316.0 17.7 1.4 38.2 5Y09 74,212 42.0 107,118 42.6 22,450 41.2 52.8 329.6 16.1 1.3 32.5 5Y10E 83,479 12.5 124,142 15.9 29,441 31.1 64.7 457.4 16.1 1.5 26.5 3Y11E 101,432 21.5 123,313 17.9 38,155 29.6 83.8 524.8 16.5 1.6 20.4 3Y12E 126,199 24.4 141,916 20.8 48,629 27.5 106.8 618.4 18.1 1.7 16.0 2urce:Company,NetworthResearch

Networth Research is also available on Bloomberg and Thomson Reuters

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HDFCBank

4.4

1.8 2.8

0.90.8

1.7

10.7

18.1

0

2

4

6

8

0

24

6

8

0

NII Non

Interest

Income

Opex Pro visions Taxes RoA Avg.

Asset/Avg.

Eq

RoE

%)

urce:Company,NetworthResearch

CompanyBackground

HDFC Bank, incorporated in 1994 by the Housing Development Finance Corpora

(HDFC),isamongsttheleadingandrelativelyconsistentprivatesectorbanksinthecou

today.Thebankhaspursuedbothorganicandinorganicgrowthstrategiestoemerge

strongplayer

in

private

banking

space.

It

acquired

Times

Bank

in

Feb

2000

and

Centu

Bank of Punjab (CBoP) in year 2008. Bank has extensive network of more than

branches and balance sheet size of about Rs1939bn. Bank has limited internat

exposureandisnotaggressivelypursuingbuildinganhugeinternationalbook,whichm

itmore resilient during globalcrisis.The integrationprocessof erstwhile CBOPbran

complete and will be brought to HDFC Bank productivity standards within next 1

months. The banks strengths include its strong brand image, proficient managem

strongearningstraction,highCASAratioandrelativelybetterassetquality.Bankalso

two nonbanking subsidiaries HDFC Securities, which is primarily into broking busi

and HDB Financial services, which is in to microlending, distribution and collec

business.

Exhibit2:

Key

events

1994 IncorporatebyHDFC

1995 IPO @Rs10

2000 AcquisitionofTimesbankinashareswapdeal(1:5.75)

2008 AcquisitionofCenturionBankofPunjabinashareswapdeal (1:29)

Source:Company,NetworthResearch

xhibit3:Keymanagementpersonnel

Name

Position

Profile

Mr.JagdishCapoor Chairman HetookoverasBankschairmansinceJuly2001.HeholdsaMastersDegreeinCommerceand

Fellow of Indian Institute of Banking & Finance. Prior to joining HDFC Bank, he was Dep

GovernorofRBI.HealsoservedontheboardsofEXIMBank,NHB,NABARDandSBI.

Mr.AdityaPuri MD He is MD of the bank since Sept 1994 and has more than 25 years of experience in ban

industry.HeholdsaBachelorsDegree inCommerce fromPunjab Universityand isanassoc

memberoftheICAI.PriortoHDFCBank,hewasheadingCitibanksMalaysiaoperations.

Mr.PareshSukthankar ED Hewasappointedon12Oct 2007 forathreeyearterm.Hehasbeenassociatedwiththeb

from1994invariousseniorcapacitiesandhasover22yearsofexperienceinfinanceandbank

Priortojoiningthebank,heworkedwithCitibankfornearly9years.

Mr.HarishEngineer ED Hehasbeenassociatedwiththebanksince1994invariouscapacitiesandiscurrentlyrespons

forwholesale

banking

division.

He

has

over

38

years

of

experience

in

banking

&

finance

and

priorexperienceworkingwithBankofAmericafor26yearsinvariousareas,includingoperat

andcorporatecreditmanagement

Source:Company,NetworthResearch

xhibit1:DuPontanalysis(FY09)

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HDFCBank

InvestmentRationale

Strong,consistentandresilientprivatebankingplayer

HDFCbankisoneofthebestbankingfranchisesamongIndianbankswithanunparalleled

network,strong

&

consistent

financial

performance

and

sound

risk

management

systems

iresulting inbestassetqualityevenduring the trying times.Bankcharacterisesacombina

privateaggressionwithapositiveflavorofPSU(strongliabilityfranchiseandconservatisminception, bank has adopted liability driven growth strategy with clear focus on mprofitabilityandsoundassetquality.During therecentsubprimecrisis,whenmanybankaffected,HDFCbankremainedasafeharboras ithadvirtuallynoexposuretothesetoxicnoranymaterialinternationalexposure.

The bank has consistently outperformed the broad industry with 52% asset CAGR, 61%growthanddeliveringaveragePATgrowthof40%andRoEof20%overpast10years.Bagainedsignificantmarketshare in industrycreditandCASAdeposits,which isamainstaybanks sectorbeating margins (>4%). To gain scale and emerge as a stronger private bplayer, bankhaseven adopted inorganicgrowthstrategy acquiring twobanks (Times baCBoP) through itsjourney till now. Goingforward, we estimate earnings trajectory tostrongandconsistentwith29%PATCAGR,RoEat18%andRoAat1.7%overFY0912E.We

thatbanks

such

as

HDFC

bank

with

strong

low

cost

liability

franchise,

robust

but

qualitative

orientedbankwillemergeassustainablewinnersinlongrun.

xhibit4:ConsistentPATgrowthabove30% Exhibit5:BetterRoEvisvisindustry

20

0

20

40

60

80

00

FY00 FY01 FY02 FY03 FY04 FY0 5 FY0 6 FY07 FY08 FY09

%

HDFCB (adj for merger) HDFCBPrivate PSUSCB

0

5

10

15

20

25

30

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

%

HDFC Private PSU SCB

urce:Company,RBI,NetworthResearch Source:Company,RBI,NetworthResearchxhibit6:Creditgrowthwellaboveindustry(YoY) Exhibit7:Gainedmarketshareevenintoughertimes

20

0

20

40

60

80

0 0

2 0

4 0

6 0

F Y0 0 FY0 1 F Y0 2 FY0 3 FY0 4 FY0 5 F Y0 6 FY0 7 FY0 8 FY0 9 Q2 FY1 0

%

HDFC (adj for merger) HDFCB Private SCB

0

1

2

3

4

5

6

FY00 FY01 FY0 2 FY0 3 FY04 FY05 FY06 FY07 FY08 FY09

%

0

5

10

15

20

25

30

Sharein industrycredit ShareinindustryCASA

Sharein pvtbanks credit ShareinpvtbanksCASA

urce:Company,RBI,NetworthResearch(SCB ScheduledCommercialbanks) Source: Company,RBI,NetworthResearch

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HDFCBank

Outperformance during recent quarters also indicates banks inherent strength a

strongresilience

Despiteeconomicslowdown,HDFCBankregisteredconsistent~30%PATgrowth,maintaining

sectorbeating margins above 4% and sound asset quality, courtesy its inherent strength

resilience.

Recent

quarterly

performance

indicates

that

bank

is

back

in

growth

pha

outperforming industry. We believe that the banks strategy to maintain strong but consist

performanceisthekeytothebankssuccess,justifyingitspremiumvaluationandmakingitab

weatherbank.

Exhibit8:Smartpostmergerrecoveryevident

0

10

20

30

40

50

60

Q4FY07

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

%

3.7

3.8

3.9

4.0

4.1

4.2

4.3

4.4

4.5

4.6

Loangrowth(YoY) PATgrowth(YoY) NIM

Source:Company,NetworthResearch

Resilientinvestment

book

HDFCBankdoesnothaveanyinternationalinvestmentbookandhenceremainsrelativelybe

insulated to global turbulence as compared to its peers. Further, it has a reasonably lo

proportionofbookintoAFScategory(atabout25%),whichinawaysecuresthebankfrom

significantadversemomentinGSecyields,butatthesametimerestrictshighertradinggain

caseofdecliningyieldsscenario.

CBoPmergerpainwaning

Asastrategicdecisiontoenhancebranchnetwork(whichotherwisewouldhavetakenatleas

3 years through organic expansion) and gain business scale, bank acquired retail focu

CenturionbankofPunjab(CBoP)atarelativelyhighercost.Thoughmergergavebankanee

scale,butadverselyimpactedbanksfinancialsandtomakeitworstfollowedbyglobalslowdo

dueto

sub

prime

crisis.

The

merger

brought

with

it

elevated

cost

structure,

high

risk

loans

underproductivethoughpotential,branchnetworkandbiggestchallenge informof integrat

process. However, bank has timely completed the integration process backed by str

managementbandwidthandhandsonexperienceandmergerbenefitsarealreadyevidentw

aheadofexpectationsupportedbyeconomicrecovery.Approximately40%oftheGNPAsas

during FY09, were contributedby CBoP. However, erstwhile CBoPshighrisk loanportfolio

almostrunoffexceptforpersonal loans,whichwilltakeanother1215monthsandthusdo

pose significant risk anymore. We expect the full benefits of the merger to flow in, leading

improvedfinancialratiosandbettervaluationsforthebank.

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HDFCBank

HDFCBankscoreswellonmostoftheparameters

We believe the key positives of HDFC bank are its strong liability franchise with higher CA

deposits leading to sector beating NIMs, strong fee income, consistent financial performa

withimpeccable

asset

quality,

strong

&

dynamic

management

and

parental

support

from

HD

Asindicated inbelowtable,HDFCbankscoreswellonmostoftheparametersandhasemer

as a consistent and seasoned private banking player over the years,justifying the premium

commands.

Exhibit9:Keybusinessandfinancialsummaryofpeerbanks

ComparativeParameters HDFC Axis ICICI

BusinessMetrics(%)

Branches(Q2FY10) 1506 916 1520

Asset(3yrCAGR) 36.0 44.0 15.0

Creditgrowth(3yrCAGR) 41.0 54.0 14.0

RetailPortfolio

(%) 55.0 22.0 45.0

CIratio 51.7 43.4 44.1

CASAratio(Q2FY10) 50.0 43.0 37.0

CASAperbranch 50.0 54.0 48.0

International/Globalbusiness 0.4 6.3 28.0

CapitalAdequacy(Q2FY10) 15.7 16.5 17.7

TierI(Q2FY10) 10.9 11.4 13.4

Margins(%)

NIM FY09 4.5 3.0 2.3

NIM Q2FY10 4.2 3.5 2.5

Yieldonadvances 13.6 10.6 10.1

Costofdeposits 6.0 6.1 6.8

Interestspread 7.6 4.5 3.3

NII/Assets 4.3 2.9 2.1

Assetquality(%)

GNPA(Q2FY10) 1.8 1.2 4.7

StressedAssets(Q2FY10) 2.4 4.1 7.2

Provisioncoverage(exc.Techw/offs) 70.0 63.0 51.1 ProvisioncoveragewellwithinRBI'sprescribedlevels

CapitalMarketexposure 4.4 2.8 2.9

CommercialRealestateexposure 7.2 6.5 7.5

Highriskindustryexposure 7.5 18.1 22.1

RWA/TotalAssets 71.0 74.0 94.0

Profitability(%)

RoE 16.1 19.1 7.8

RoA 1.3 1.4 1.0

Qualitativeasset

profile

leading

to

lower

NPA's

and

capital

requiremen

Lowerinternationalexposuresavedthebankfromsubprimeeffect

Phenomenalgrowthbutwithquality.Weestimatecreditgrowthat24

onhighbaseoverFY0912E.

Branchexpansionandmergersynergiestohelpsustainindustrybest

CASAratio.

Recentwarrantconversionwillleadto250bpsimprovementinTierI

capital.ExpectCARatcomfortablelevelofabout15.6%,withTierI

capitalatabout11.6%byFY12Ewithoutfurthercapitalinfusion

RoEstoimprovefurther,buttoremainbelowhistoricalaverages.RoA

settoimprovewithimprovingNII/Assetsandfeeincome

Commentary

HDFCbankcommandssectorbeatingmarginsowingtostronglowcos

franchisetofundhigheryieldingassets.Despiteslowdown,banksNIM

remainednearlystable.WeexpectNIM'storemainrangeboundat

about4.44.5%overFY0912E

Planstoaddabout200250brancheseveryyear

Higherretail

portfolio

but

lower

NPA's

Postmerger,CIratiocomingoff

Bestassetqualitywithoneoftheloweststressedassets.

Source:NetworthResearchNote:PrimarilyFY09figures;butusedQ2FY10numbersaswellwhereveravailableandrelevant

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HDFCBank

Growthsettoreturn,butwithquality

After adopting goslow strategy considering economic slowdown and expensive CBo

acquisition, bank is gearing up to get back on growth path, which is evident during past

quarters.Bankhasregisteredabout11%YoYand10%QoQgrowthduringQ2FY10,afternegati

sequentialgrowth

in

Q3FY09

and

flat

growth

in

Q4F09.

The

growth

has

come

despite

run

off

o

CBoPportfolio,primarilydrivenbycorporate(35%in1HFY10)andcarloans(10%in1HFY10).

Asastrategy,bankwillcontinuetofocusoncorporateloangrowth,butwithmacro econom

risksretreating,bank isalso likely to registersignificantrevival in retail loangrowth.System

demandforretailloans(especiallyautoandhousingloans)hasimproved.HDFCbankhasbeen

dominantplayer inauto financingwithmorethan30%marketshareamongstbanksandwi

autosalesreviving,bankislikelytoregisterbettergrowthinthissegment.Weestimatebank

registerbetterthansystemcreditexpansionatabout24%CAGRoverFY0912E,wellsupport

byimprovingeconomicconditionsandsufficientlowcostfundstofundhighercreditgrowth

better margins. The bank is still not looking aggressively at building international loan boo

whichshouldfurtherinsulatebankfromanyneartermshocksininternationalmarkets.

Exhibit

10:

QoQ

loan

growth

reviving

Exhibit11:

Better

loan

growth

v/s

peers

&

industry(1HFY10)

22.3

5.6

3.4

0.1

5.0

9.5

5

0

5

10

15

20

25

Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10

%

15.0

12.6

0.6

5.54.3

1.4

15

10

5

0

5

10

15

20

HDFC ICICI Axis SBI SCB Pvt

%

Source: Company,NetworthResearch Source:Company,NetworthResearch

Loanmixtiltingtowardscorporate,securedandhighdurationassets

Traditionallybankhasbeenapreferredworkingcapitalfinancierratherthanlongtermfinan

and leveraginguponthesameduringdownturn,bankhasconsciouslybuildup itsrelatively

riskcorporate loan book.Bankhas indicated that itwill like to furtherexploreopportunitie

midtolongterminfrastructurefinancing,whichwouldincreasethedurationofitsloanporto

subjecttoappropriatepricing. Withinretailportfolioalsobankhasconsciouslyallowedhigh

2WandLASportfoliotorunoffandhaskept itsCV,personal loan,businessbankingandcr

cardportfolionearlystable.Aspermanagement,CBoPshighrisk2Wportfoliohasvirtuallyr

off,while

personal

loan

portfolio

would

take

another

12

15

months.

Bank has been retaining home loans originated by it for HDFC limited (in contrast to ear

practice of transferring the loans to HDFC), along with acquired home loan portfolio fr

erstwhileCBoP,whichshouldmaketheretailportfoliomoresecured,helpfulfillitsprioritysec

lending target and also improve the duration of the portfolio. We believe that banks revi

growth phase will also be qualitative, bringing in more stability, comfort and resilience du

toughtimes.

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HDFCBank

Exhibit12:Loancompositionshiftingtowardscorporates

38.443.2

38.2 41.044.9

0%

20 %

40 %

60 %

80 %

100%

Q4FY08 Q1FY09 Q4FY09 Q1FY10 Q2FY10

Corporate PV CV2W Personal CreditCardLAS Bus iness banking Housing& others

Source: Company,NetworthResearch

Impeccableassetqualitywithoneoftheloweststressedassets

HDFC Bank has maintained robust asset quality despite higher retail exposure and econo

slowdown,primarilydueto itsprudent lendingpracticesandconservativeprovisioningpolic

Consideringstressfuleconomicenvironment,highershareofretailbook,highrisk loanportf

(2Wsandpersonal loans)acquired fromCBoP,seriousconcernswereraisedaboutbanksas

quality.Howeversensingthestress,thebankconsciouslyallowedCBoPhighriskloanportfolio

runoffandalsosomberdown itscreditgrowthmachinetoarrest incrementalNPLs.Bank

once again emerged as one of the best bank in terms of asset quality with one of the low

stressedassetsinIndianbankingindustry.

GNPAsdeclined6%QoQduringQ2FY10to1.8%,indicatinglikelypeakingofdelinquenciesinn

term.Further,

overall

stressed

assets

including

restructured

assets

stood

at

about

2.3%,

whic

one of the lowest in the industry. However, factoring in higher retail portfolio including C

portfolio,weconservativelyestimateGNPAatabout1.9%andNNPAat0.5%byFY12E.

xhibit13:Assetqualityrisksnearlypeaked Exhibit14:Loweststressedassetsamongstpeers(Q2FY10)

1.3 1.3

1.51.6

1.92.0

2.1

1.8

2.1 2.1

1.9

.0

.5

.0

.5

.0

.5

FY07

FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

FY10E

FY11E

FY12E

GNPA NNPA

0

1

2

3

4

5

6

7

8

9

HDFC Axis KMB UBI ICICI SBI PNB BOI

%

GNPA Restructuredloans

urce:Company,NetworthResearch Source:Company,NetworthResearch

%)

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HDFCBank

Higherprovisioncoveragecomforting

HDFC Bank has traditionally maintained a NPA coverage ratio above 67% (well above 10

including general provisions) driven by consistently higher operating profitability (hig

operating income/average assets at about 3%). We estimate operating profits to grow at 2

CAGR

over

FY0912E,

providing

enough

cushion

for

higher

NPA

provisioning,

if

required.

expectNPAcoverage tobe intherangeofabout7476%,which iswellaboveRBIsprescri

levelof70%,keepingitsnetNPAwellbelow1%overFY0912E.

Exhibit15:Adequateprovisioncoverageabove70%

83.8

91.7

86.2

69.5 69.267.1

68.6

75.874.5

76.1

50

55

60

65

70

75

80

85

90

95

FY0 3 FY0 4 FY0 5 F Y0 6 FY0 7 FY0 8 FY0 9E F Y1 0E F Y1 1E F Y1 2E

%

Source:Company,NetworthResearch

Oneofthebestliabilityfranchisesandfurtherbuildingmuscle

HDFCbankhasoneofthebestliabilityfranchiseswithmorethan70%ofbrancheslocatedin

CASA rich metro and urban regions of the country. Traditionally, bank had strong presence

North, West and southern region, which has been further amplified with acquisition of CB

Most of the banks have realised importance of maintaining adequate branch network, wh

helpsin

procuring

low

cost

CASA

deposits

and

thus

control

cost

of

funding

in

long

run

to

maint

margins.HDFCbankhasbeenaggressiveonthisfrontsince its inceptionandhasevenacqui

banks to bolster itsbranch network. Historically,bank hasmaintainedhigherCASA ratio in

rangeofabout40%55%,whichprovidestheflexibilitytolendatcompetitiveratestocustom

andstillmaintainoneofthebestmarginsintheindustry.

hibit16:WellspreadCASArichbranchnetwork Exhibit.17:HDFCBankhashighershareofmetro+urbanbranches

North

30 %

South

26 %

West

25 %

East

9%

Central

10 %

29%39%

32%

16%

28%

34%40%

25%

33%

23% 24%

53%

10%5% 4% 6%

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

100%

ICICIBank HDFCBank AxisBank FederalBank

Metro Urban Semiurban Rural

urce: Company,NetworthResearch Source: Company,NetworthResearch

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HDFCBank

Branchexpansionbackontrackafteralull

Post merger, bank had consciously slowed down branch expansion for about 3 quarters

Q1FY10.However,offlatewithintegrationprocessofCBoPbranchesoverandeconomyback

track,bankhasreviveditsorganicbranchexpansionplanopeningabout90branchesinQ2FY

It

plans

to

open

about

200250

branches

every

year,

majority

of

which

will

be

stripped

do

versionofbranches.

Exhibit18:Banktoaddabout200250brancheseveryyear

684 761

1412 1506

16861836

2036419

0

500

1000

1500

2000

2500

FY07 FY08 FY09 Q2FY10 FY10E FY11E FY12E

Nos

Source:Company,NetworthResearchSuperlativeCASAratiointheindustry

Bank has one of the best CASA ratio in the industry at about 50% with higher share of sta

savingsdepositsandretaildeposits.Highersavingsdepositshasbeenduetobankswidespr

branch network and its focus on corporate salary a/cs. Post merger with CBoP and owing

industrywide phenomenon of cannibalization of savings accounts due to increased r

differentialbetween

savings

and

term

deposits,

banks

CASA

ratio

had

fallen

to

about

40%

du

Q3FY09fromahighof54%premerger.However,withfallingtermdepositrates, integratio

erstwhile CBOP branches and continued branch expansion supported by float arising fr

improved transactional banking and IPOs, CASA ratio has already started shown signs

improvementtoabout50%inQ2FY10(CoreCASAratio47%).Webelievethatsignificantbra

expansion,reducingspreadbetweentermandsavingdepositratesand incrementalCASAfr

wellintegratedCBoPbranchesshouldhelpbankmaintainCASAratio intherangeofabout5

andthussustainitssectorbeatingmargins(>4%).

Exhibit19:OneofthehighestCASAratiowithhighershareofsavingsdeposits

29%

25% 24%

30%

21%

12%19% 8%

16%

19%

2%

13%

0%

10%

20%

30%

40%

50%

60%

HDFC ICICI Axis PNB

8%

3%

2%

7%

12%

17%

22%

Sa vings Current CASAmobilisationduring1HFY10

Source:Company,NetworthResearch

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10/161HDFCBank

helpedmaintainbestinclassmarginsabove4%despiteindustrywidepressure

HDFC Bank commands best in class NIMs in the banking industry (only after Kotak Mahin

Bank),primarilyonaccountoflowercostoffunds(ledbyhigherCASA)andbetteryields(hig

retail exposure). NIMs were under pressure owing to falling interest rates and higher cos

funds

since

the

onset

of

slowdown.

However,

HDFC

Bank

managed

to

maintain

its

marginabout4.2%duringpast3quarterswithmarginalcompressioncourtesy itsastoundingability

controlcostoffunds.Goingforward,withcreditgrowthbackontrack includingrevival inre

loansandimprovementinCASAratio,weexpectbanksNIMtosettlearound4.5%.

xhibit20:NIMstosettlearound4.5% Exhibit21:NIMssustaineddespiteindustrywidepressure

4.4

4.9

4.5

4.4

4.54.5

.1

.2

.3

.4

.5

.6

.7

.8

.9

.0

FY07 FY08 FY09 FY10E FY11E FY12E

2.2

2.6

3.0

3.4

3.8

4.2

4.6

Q3FY09 Q4FY09 Q1FY10 Q2FY10

HDFC ICICI Axis SBI PNB

urce: Company,NetworthResearch Source:Company,NetworthResearch

Strong,nonvolatileandwelldiversifiedsourceofnoninterestincome

NoninterestincomecontributiontonetincomeforHDFCbankhasbeenlowerascomparedto

peers at about ~30%, but is relatively strong and less volatile with nontrading inco

contributing about 88% of other income. Core fee income excluding forex & derivative ga

contributesabout75%ofthenoninterestincome,ofwhichnearly75%isfromretailoperatio

The bank has well diversified feebased product portfolio for both retail (viz loan process

creditcard,depository,thirdpartyandotherfeebasedproducts)andcorporateclients(vizc

banking,tradefinance,CMS),whichendowsstabilityandsustainabilitytoitsfeeincome.

Exhibit22:Noninterestincomelessvolatilewithhighershareofnontradingincome

-20%

0%

20%

40%

60%

80%

100%

FY05 FY06 FY07 FY08 FY09 1HFY10 FY10 FY11E FY12E

Fees & Commiss ion Trading income Forex & derivat ives

Source:Company,NetworthResearch

(%) (%)

8/8/2019 hdfc_bank_110110

11/161HDFCBank

Bank has identified improving fee income as one of the key focus area and is taking vari

measures to enhance the same. CBoPs acquisition (strong in feebased third party prod

distribution, remittance, forex&derivativebusiness)wasone suchstrategicmovetoenrich

feebased product basket, increase its reach and customer base. As a result, share of fore

derivative

income

has

significantly

improved

in

banks

non

interest

income.

Bank

has

strpresenceinretailsegment;however,offlateshareofcorporateloanstoohasincreasedinba

loanportfolio, indicating increasedactivityoncorporateside,whichshouldfurtherboostba

fee income. During 1HFY10, noninterest income growth has been robust, driven by hig

treasuryandfee income.Withrisingbondyields,treasury incomeoutlookremainsweakdu

2HFY10,however,feeincomegrowthislikelytoremainrobustwithmanagementexpectingi

track loangrowth.Weexpectbanksnoninterest income to register15%CAGRoverFY091

withcorefeeincomeat17%CAGR.

Exhibit23:Feeincometotrailloangrowth

0

10

20

30

40

50

60

70

80

FY0 5 FY0 6 FY0 7 FY0 8 FY0 9 FY1 0E FY1 1E FY1 2E

%

0

10

20

30

40

50

60

70

80

90

100

Non-interest income growth Fee income Loan growth

Source:Company,NetworthResearchCostincomeratioimproveswithsynergieskickingin

PostCBoP

merger,

HDFC

banks

(merged)

cost

income

ratio

had

increased

to

about

56%

owing

highcostoperatingstructureofCBoPandintegrationrelatedexpenses,whichhasnowcome

withsynergieskickingin.BankhasmanagedtocontroltheCIratiowellaheadofexpectation,

bysignificantimprovementinoverallproductivity,bettertreasurygainsandpickupinfeeinco

fromCBoPbranches,whichhadbeenbadlyaffectedpostmerger.With integrationnearlyo

expensesareexpectedtobeundercontrolandwithmergerbenefitsinking in,webelievet

thereisfurtherscope,thoughnotsignificantforimprovementinCIratiotoabout45%byFY12

Exhibit24:Postmergercostefficiencyshowingdefinitivesignsofimprovement

50.3

55.7 55.3

50.047.1 47.6 46.2 46.2 4 5. 2 4 5. 1

0

10

20

30

40

50

60

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

FY10E

FY11E

FY12E

%

Source:Company,NetworthResearch

8/8/2019 hdfc_bank_110110

12/161HDFCBank

Betterearningsvisibilityemerging;howeverRoEstoremainbelowhistoricalaverag

Bankhadconsciouslysloweddownthepaceofloangrowthresultinginrelativelymoderatec

earnings. However, with economy well on revival and dampening impact of CBoP mer

retreating,creditandearningsgrowthmomentumhasrecentlypickedup.Weexpecttheban

deliverstrong

and

consistent

29%

PAT

CAGR

over

FY09

12E,

on

the

back

of

steady

NIMs,

be

feeincomeandassetquality.

BankhasregisteredaverageRoEofabout20%overpast10years,whichhascomedowntoab

16%,primarily impactedduetosignificantequitydilutionpostmerger.However,goingforw

weestimateRoEtoimprovetoabout18%byFY12E,asbankgetsbacktohighgrowthphase

productively deploys the infused capital. We expect better NII growth and higher fee inco

contributiontooverallincometoimproveleadingtobetterRoAatabout1.7%byFY12E.

Exhibit25:Returnratioslikelytoimprovebutremainbelowhistoricalaverage

19.517.7

16.1 16.1 16.518.1

1.7

1.4 1.41.3

1.5

1.6

0

5

10

15

20

25

FY07 FY08 FY09 FY10E FY11E FY12E

%

0.0

0.4

0.8

1.2

1.6

2.0

RoE-LHS RoA-RHS

Source:Company,NetworthResearch

Warrantconversionfurtherenhancescapitaladequacy

Bankhasdecentcapitaladequacyatabout15.7%, includingTierIcapitalatabout10.9%du

Q2FY10.Parent HDFChassubscribedto26.2mnwarrants(atissuepriceofRs1530),whichb

hadissuedtoHDFCpostCBoPmergertoretainlattersholdinginthebank.Concernswererai

aboutsubscription of thesewarrants as the stock priceofHDFC bank haddeclinedwell be

issueprice,however,thesamehasbeenputtorestwithmarketrecoveryandcontinuedsupp

from parent, which is also a major comforting factor for the bank. Warrant conversion led

morethan200bpsincreaseinTierIcapitalandisbookvalueaccretiveasitenhancedbookva

by Rs87.5 i.e23% against equity dilutionof mere6%. We estimateoverall CAR at comforta

levelof

about

15.6%,

with

Tier

Icapital

at

about

11.6%

by

FY12E

without

further

capital

infusio

8/8/2019 hdfc_bank_110110

13/161HDFCBank

ValuationAnalysis

Richvaluationstostay;recommendaccumulate

Overtheyears,bankhasbuildstrongassetandliabilitybasewithsoundbusinesspractices,wh

has

helped

it

sail

through

double

hit

of

expensive

merger

and

economic

slowdown.

Bcommands premium valuation primarily due to its consistent earnings growth of above 3

sectorleading NIMs (>4%), robust asset quality, sound management and allinall its ability

emerge asastrongand resilientprivatebankingplayer.Withprofitableandqualitativegro

wellsettoreturnandmergerbenefitssinking in,webelievethatbankwouldcontinuetoen

premiumvaluations.

Thestockiscurrentlyrichlyvaluedat20.4xEPSand3.3xFY11EadjustedBV.Ithasprimarilyb

tradingintheoneyearforwardP/AdjBVrangeof24xwithmaxP/AdjBVof5.5xandminof1

inpast10yearswithasignificantpremiumoversector.WevalueHDFCBankassigningaP/adj

of3.7xonFY11Eadj.BVofRs525toarriveatavalueofRs1940,providinganupsideof13%fr

currentlevels.Hencerecommendaccumulateonthestock.

Exhibit26:OneyearforwardP/AdjBV

0

200400

600800

10001200

14001600

18002000

22002400

2600

31Mar02

18Aug02

05Jan03

25May03

12Oct03

29Feb

04

18Jul04

05Dec04

24Apr05

11Sep05

29Jan06

18Jun06

05Nov06

25Mar07

12Aug07

30Dec07

18May08

05Oct08

22Feb

09

12Jul09

29Nov09

Rs

0

20004000

60008000

1000012000

1400016000

1800020000

2200024000

26000

Index

HDFC Bank 2.0 2.5 3.03.5 4.0 4.5 Sensex (RHS)

Source:Company,NetworthResearch

xhibit27:HDFCBsustainspremiumoverAxis&ICICI Exhibit28:P/BVchartcycleHDFCBankv/sAxis&ICICI

0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Apr05

Aug

05

Dec

05

Apr06

Aug

06

Dec

06

Apr07

Aug

07

Dec

07

Apr08

Aug

08

Dec

08

Apr09

Aug

09

HDFCBoverAxis HDFCoverICICI

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1Apr05

1Aug05

1Dec05

1Apr06

1Aug06

1Dec06

1Apr07

1Aug07

1Dec07

1Apr08

1Aug08

1Dec08

1Apr09

1Aug09

HDFCBank Axis ICICI

urce: Bloomberg,NetworthResearch Source: Bloomberg,NetworthResearch

(%)

8/8/2019 hdfc_bank_110110

14/161HDFCBank

Underperformedbroadindicesandpeers,buttorecover

StockhasunderperformedthebroadindicesanditspeerssinceMar09marketrecovery,due

concernonbanksgrowthandassetquality.However,withgrowthcomingback to fore,as

qualitystabilisingandearningsgaining traction leadingto improvement in itsRoE,webelie

thatbank

should

perform

better.

xhibit29:UnderperformeditspeerssinceMar09recovery Exhibit30:Underperformedbroadindices

0

50

0 0

5 0

0 0

5 0

0 0

5 0

3Mar09

12Mar09

21Mar09

30Mar09

8Apr0

9

17Apr0

9

26Apr0

9

5May09

14May09

23May09

1Jun0

9

10Jun0

9

19Jun0

9

28Jun0

9

7Jul0

9

16Jul0

9

25Jul0

9

3Aug0

9

12Aug0

9

21Aug0

9

30Aug0

9

8Sep0

9

17Sep0

9

26Sep0

9

5Oct0

9

14Oct0

9

23Oct0

9

1Nov0

9

10Nov0

9

19Nov0

9

28Nov0

9

7Dec0

9

Axis ICICI HDFC Bank

40

80

12 0

16 0

20 0

24 0

28 0

32 0

36 0

3Mar

09

12Mar

09

21Mar

09

30Mar

09

8Apr

09

17Apr

09

26Apr

09

5May

09

14May

09

23May

09

1Jun

09

10Jun

09

19Jun

09

28Jun

09

7Jul

09

16Jul

09

25Jul

09

3Aug

09

12Aug

09

21Aug

09

30Aug

09

8Sep

09

17Sep

09

26Sep

09

5Oct

09

14Oct

09

23Oct

09

1Nov

09

10Nov

09

19Nov

09

28Nov

09

7Dec

09

16Dec

09

25Dec

09

3Jan

10

HDFC Bank Sensex

Bankex Large Pvt bank index

urce: Bloomberg,NetworthResearch Source: Bloomberg,NetworthResearch

Keyrisksandconcerns

Higher delinquencies: Though retail NPAs have nearly peaked, corporate NPAs could

bringin

pain.

Further

overall

systemic

risk

still

remains

though

moderated,

posing

risk

to

overallloanportfolioandthushigherdelinquencies.

Slowdowninbranchexpansion:Bankhasunveiledsignificantbranchexpansionplan,whic

scaleddownornottimelyexecutedcouldaffectCASA&businessgrowthassumptions.

Retracement of fiscal stimuli: Government has taken various fiscal measures, which

helped speedy economic recovery, including supporting credit growth and in partic

automobile segment. However, fiscal stimulus is likely to be retraced sooner, which co

affectrecoveryprocessandoverallcreditgrowthofbankingindustry.

(%) (%)

8/8/2019 hdfc_bank_110110

15/161HDFCBank

nancialSummary

comeStatement (Rs.mn) Ratios

EMarch FY08 FY09 FY10E FY11E FY12E Y/EMarch FY08 FY09 FY10E FY11E FY

terestEarned 101,150 163,323 169,202 199,863 248,131 BalSheetRatios(%)

terestExpended

48,871

89,111

85,723

98,431

121,932

Loans/Deposits

62.9

69.2

75.4

75.4

etInterestIncome 52,279 74,212 83,479 101,432 126,199 CASARatio 54.5 44.4 50.5 50.0

owth(%) 50.7 42.0 12.5 21.5 24.4 LoanGrowth 35.1 24.2 22.5 25.0onInterestIncome 22,832 32,906 40,663 44,956 50,667 DepositGrowth 47.5 16.5 12.5 25.0

owth(%) 50.6 44.1 23.6 10.6 12.7 OperatingRatios(%)e,forexandotherinc 21,191 29,081 34,663 40,456 46,167 NIM 4.9 4.5 4.4 4.5

etIncome 75,110 107,118 124,142 146,388 176,866 Nonintinc/Netinc 30.4 30.7 32.8 30.7

owth(%) 50.7 42.6 15.9 17.9 20.8 EmplCosts/OpCosts 34.7 40.5 41.0 41.1peratingExpenses 37,456 55,328 57,390 66,116 79,822 Cost/Income 49.9 51.7 46.2 45.2

owth(%) 54.7 47.7 3.7 15.2 20.7 Operatingcostgrowth 54.7 47.7 3.7 15.2mployeeexpenses 13,014 22,382 23,519 27,181 33,250 Totalprov/avg.loans 1.9 1.8 2.1 1.7

herexpenses 24,443 32,946 33,871 38,935 46,572 AssetQualityRatios(%)

eProvProfits 37,654 51,790 66,752 80,271 97,044 GrossNPA 1.3 2.0 2.1 2.1

ov&

Contingencies

14,843

18,797

24,084

24,974

26,053

Net

NPA

0.5

0.6

0.5

0.5

anlossprovisions 10,264 16,058 23,351 23,079 24,031 Slippage 1.9 3.5 1.9 1.6

T 22,811 32,993 42,668 55,297 70,991 NPLcoverageratio 67.1 68.6 75.8 74.5

ovisionfortaxes 6,909 10,543 13,227 17,142 22,362 CapitalAd.Ratios(%)

AT 15,902 22,450 29,441 38,155 48,629 TotalCAR 13.6 15.7 17.4 16.4

owth(%) 39.3 41.2 31.1 29.6 27.5 Tier1CAR 10.3 10.6 12.7 12.0ProfitabilityRatios(%)

RoAE 17.7 16.1 16.1 16.5

RoAA 1.4 1.3 1.5 1.6

ValuationsRatios

BVPS(Rs) 324.4 344.3 471.2 543.1 6

Price/BV(x) 5.3 5.0 3.6 3.2

AdjustedBVPS(Rs) 316.0 329.6 457.4 524.8 6

Price/Adj.

BV

(x)

5.4

5.2

3.7

3.3

lanceSheet (Rs.mn) EPS(Rs) 44.9 52.8 64.7 83.8 1

EMarch FY08 FY09 FY10E FY11E FY12E P/E(x) 38.2 32.5 26.5 20.6

shandbalwithRBI 125,532 135,272 139,572 156,442 186,566 DividendYield 0.5 0.5 0.4 0.4

terbankbalance 22,252 39,794 24,099 36,149 45,186

ans 634,269 988,831 1,211,317 1,514,147 1,892,683 DupontAnalysis

vestments 493,935 588,175 634,619 783,232 941,385 Y/EMarch FY08 FY09 FY10E FY11E FY

talintearningassets 1,275,988 1,752,072 2,009,608 2,489,970 3,065,821 %ofAverageassetsxedAssets 11,751 17,067 20,419 21,660 23,278 NetInterestIncome 4.7 4.3 4.2 4.3

herAssets 44,026 63,568 77,559 80,285 89,977 NonInterestIncome 2.0 1.9 2.1 1.9

talAssets 1,331,766 1,832,708 2,107,586 2,591,916 3,179,076 NetIncome 6.7 6.3 6.3 6.2

posits 1,007,686 1,428,116 1,606,630 2,008,288 2,510,360 OperatingExpenses (3.3) (3.2) (2.9) (2.8)

herIntbearingLiab 78,440 91,636 127,152 145,008 161,031 OperatingProfit 3.4 3.0 3.4 3.4

talInt.bearingliab 1,086,126 1,519,752 1,733,782 2,153,296 2,671,391 Provisions (1.3) (1.1) (1.2) (1.1)

hernonint.bear.liab 130,667 162,428 159,244 191,368 217,268 Taxes (0.6) (0.6) (0.7) (0.7)

talLiabilities 1,216,794 1,682,180 1,893,027 2,344,664 2,888,658 RoA(%) 1.4 1.3 1.5 1.6

uity 114,972 150,527 214,559 247,252 290,418 Avg.assets/avgeq.(x) 12.5 12.3 10.8 10.2

talLiab&Equity 1,331,766 1,832,708 2,107,586 2,591,916 3,179,076 RoE(%) 17.7 16.1 16.1 16.5

rce:Company,NetworthResearchte:RatiosforFY09arecalculatedassumingmergedfinancialsforFY08&FY09

8/8/2019 hdfc_bank_110110

16/16

NetworthResearch:Email research@networthdirect.com

SatishPasari Head InstitutionalBusiness satish.pasari@networthdirect.com 02222823225/22840219

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KeytoNETWORTHInvestmentRankingsBuy:Upsideby>15,Accumulate:Upsideby+5to15,Hold:Upside/Downsideby 5to+5,Reduce:Downsideby5to15,Sell:Downsideby>15

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