ICICIdirect HDFCBank Report

8/3/2019 ICICIdirect HDFCBank Report

1/21

1 | P a g e

ICICIdirect|Equity Research

Analysts Name

Kajal [email protected] [email protected] [email protected]

NII trend

5228 7499

9074 10416

2000

7000

12000

FY08 FY09 FY10E FY11E

(Rs

Crore)

Stock Metrics

Bloomberg Code HDFCB IN

Reuters Code HDBK.BO

Face value (Rs) 10

Promoters Holding 19%

Market Cap (Rs cr) 57937

52 week H/L 1540 / 774

Sensex 13886Average volumes 1538386 Comparative return metrics (%)

Stock Returns 3m 6m 12m

Axis Bank 87 79 -16

HDFC Bank 55 67 -3

Kotak bank 162 127 -12

Yes Bank 134 101 -21 Price Trend

700

1000

1300

1600

1900

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

Close Price Absolute Buy

Absolute Sell Target Price

May 25, 2009 | Banking

Initiating Coverage

HDFC Bank (HDFBAN)

Stable & consistent delivery of qualityHDFC Bank has historically traded at premium multiples due to its strongdeposit franchise, stable earnings growth, reputed management and highRoE. However, the challenging economic environment will moderategrowth momentum and pose challenges, going ahead. We expect thebalance sheet to grow at 17% CAGR over FY09-FY11E to Rs 2,52,921crore. We are initiating coverage on the stock with a HOLD rating.

Business momentum moderating Aims growth coupled with profitabilityWe expect the merged entity to grow its advance book by 21% CAGRto Rs 145757 crore and deposit by 19% to Rs 202282 crore by FY11E.The merger has helped HDFC Bank gain market share, which is nearly4% now. We believe HDFC Bank will retain its market share, going

ahead as well. The growth in advances should lead to NII growth of18% CAGR over FY09-FY11E to Rs 10416 crore. This, in turn, shouldlead to a PAT growth of 25% CAGR to Rs 3497 crore by FY11E.

Liability franchise (CASA) to provide shelter to maintain NIMsHistorically, HDFC Bank has managed to garner CASA of above 50%but the ratio has now moderated to 44% in FY09 due to the merger.We believe the underleveraged branches of CBoP will shore up toHDFC Banks level from FY10E. Hence, we expect CASA mobilisationto start inching up again and reach 48% by FY11E. This will help thebank to maintain NIMs of over 4% in the coming years as well.

ValuationsAt the CMP of Rs 1366 the bank is trading at 3.1x and 2.9x its FY10Eand FY11E ABV, respectively. We expect HDFC Bank to be able togenerate RoEs in the range of 15-16% over the next two years. Afterconsidering three possible scenarios of capital raising via warrantsconversion (Exhibits 31 to 33), we value the bank at originalconversion price of Rs 1520. Thereby, we have arrived at FY11E fairABV of Rs 478. We value the stock at 3.0x FY11E ABV to arrive at atarget price of Rs 1434. We recommend a HOLD rating on the stock.

Current PriceRs 1366

Target PriceRs 1434

Potential upside6%

Time Frame12 months

HOLD

Exhibit 1:Key Financialsear to March FY08 FY09 FY10E FY11E

Net Profit (Rs crore) 1590.2 2245.0 2809.1 3497.0

EPS (Rs) 44.9 52.9 66.2 82.4

Growth (%) 25.5 17.8 25.1 24.5

P/E (x) 30.5 25.9 20.7 16.6

Price / Book (x) 4.2 3.9 3.4 3.1

Price / ABV (x) 4.3 4.2 3.7 3.3

GNPA (%) 1.4 2.0 2.7 2.5

NNPA (%) 0.5 0.6 1.1 0.9

RoNA (%) 1.4 1.3 1.4 1.5

RoE (%) 17.7 17.0 17.6 19.4

Source: Company, ICICIdirect.com Research


2/21

2 | P a g e

Company Background

HDFC Bank, a new-generation bank, is the second largest private-sector bank, which received a banking licence in 1994. HousingDevelopment Finance Corporation (HDFC) promoted the bank tocapitalise on the opportunity provided by the Reserve Bank of India

(RBI) as it opened up the banking industry to private players.

Exhibit 2:Expansion in distribution platform

256

535

684

761

1412

1184

1323

1605

1977

3295

0 1000 2000 3000 4000 5000

FY05

FY06

FY07

FY08

FY09

Branches ATM


Exhibit 3:Historical growth in business

34

47

73

5144

37 34

58

38

51

27

36

20

53

22

4237

50

39 41

29

47

27

4248

35

48

10

30

50

70

90

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

(%)

Advances Deposits Total Business


Key financial highlights for FY09

- Total income grew by 58.2% to Rs 19623 crore- Net revenues (NII + other income) growth of 42.6% to Rs 10712 crore- NIM (reported) @ 4.2%, CASA @ 44.4%- Net profit grew 41.2% to Rs 2245 crore- Balance sheet size stood at Rs183271 crore- Deposits Rs 142812 crore, advances Rs 100239 crore- CAR @ 15.7%, Tier I @ 10.6%- GNPA @ 2.0%, NNPA @ 0.6%

Shareholder % holding

Promoters 19.4

Institutional investors 39.6

Other investors 8.8

General public 32.3

Promoter & Institutional holding trend (%)

19.4 19.4 19.4 19.4

33.636.6

38.039.6

10

20

30

40

50

Q1 Q2 Q3 Q4

(%)

Promoter Holding Institutional Holding


3/21

3 | P a g e

Investment Rationale

Business momentum moderating Aims at growth coupled with profitability

Market share: On the up move

The merger with Centurion bank of Punjab (CBoP) has enabled the bank toenjoy higher market share. HDFC Bank had 2.3% market share in FY06 of thetotal credit outstanding in the system for scheduled commercial banks, whichimproved gradually to 2.7% in FY08. This went up to 4% by the end of June2008 (first merged results). Similarly, the share of deposits went up from 2.6%in FY06 to 4.0%. We expect the merged entity to grow its advance book by21% CAGR to Rs 145757 crore and deposit by 19% CAGR to Rs 202282 croreby FY11E. The expanded distribution network of 1421 branches will supportthese growth projections, going ahead.

Exhibit 4:Market share on the rise

243068245554241601227715

16419611524390858

2.7 2.6

3.2

2.42.3

3.8

4.0

4.0 3.8

3.84.0

4.0

2

3

4

5

FY06 FY07 FY08 Q1FY09 Q2FY09 Q3FY09 FY09

80,000

160,000

240,000

(%)

(Rscrore)

Total Business (RHS) Advances Deposits


In an industry where all other major players like BoI and PNB are eitherconsolidating or inching up their market share slowly, HDFC Bank is actuallystrengthening its position in the industry mainly due to the merger.

Exhibit 5:Market share in advances

17.5 17.7 18.5 17.7 18.9 19.620.0

5.0 5.1 4.8 5.15.2 5.3 5.4

2.4 2.74.0 4.2 3.8 3.9 3.84.4 4.8

5.1 5.1 5.15.2 5.3

10.0

20.0

30.0

40.0

FY07 FY08 Q1FY09 Q2FY09 Q3FY09 FY09 FY10E

(%)

SBI PNB HDFC Bank BOI


Exhibit 6:Market share in deposits

16.8 16.8 17.1 18.0 18.219.4 19.7

5.4 5.2 5.3 5.45.4 5.2

5.32.63.2 4.0

3.9 4.0 3.7 3.84.6 4.74.9 4.8 4.7

5.0 4.9

10.0

20.0

30.0

40.0

FY07 FY08 Q1FY09 Q2FY09 Q3FY09 FY09 FY10E

(%)

SBI PNB HDFC Bank BOI


Growth assumption for FY10E Deposit-17%, advances-18%Market share calculated only for scheduled commercial banks.

HDFC Bank added 660

branches in FY09 to take

its tally to 1421 branches

from 761 in FY08.This will help the bank to

grow its deposits base

by 19% CAGR over FY09-

FY11E

The merger has enabled

HDFC Bank to capture

higher market share

even in tough conditions


4/21

4 | P a g e

Liability franchise (CASA) to provide shelter to maintain NIMs

Low cost deposits (CASA) will prove important, going ahead, for the bank tomaintain NIMs of above 4% levels. The deposits for HDFC Bank grew at aCAGR of 37% for FY06-09. Deposits are always in the range of 70-75% aspercentage of total liabilities for the bank over the years. This shows greatdependence on liability franchise for growth. Hence, higher CASAmobilisation will always be on the top of the agenda for this bank in FY10E.

Exhibit 7:Deposit mobilisation momentum continues

55796

68297

73506

91235

133176 1

83271

214717

252922

100768

142812

168228

202282

47.5

41.7

24.1

46.0

37.6

20.217.8

22.4 17.817.2

25000

75000

125000

175000

225000

275000

FY06 FY07 FY08 FY09 FY10E FY11E

(Rscrore)

10

20

30

40

50

(%)

Deposits T.Liabilities

Deposit growth (RHS) T. liab growth (RHS)


CASA accumulation was the strongest point for HDFC Bank historically. It hasmaintained its CASA ratio of over 50% for years. The merger of CBoP and therising interest scenario in H1FY09 resulted in a deceleration in CASA fromover 50% to 40% by December 2008 and inching back again to 44% by March2009. The economic scenario is now changing rapidly and interest rates areheading southwards again due to falling inflation. This will reduce themounting gap between term deposits and saving deposits. Inflation for theweek ended April 24 2009 was 0.6% against a peak of 13% odd earlier inAugust 2008. Therefore, this should help in garnering CASA for the comingyear. We expect CASA of 48% for FY11E.

Exhibit 8:Deposit mix

26154 31853 32794 33081 3491541898

5362928765 26929 26123 24258

2844535896

4369745850

72136 7491787523

89231

90433

104956

5000

30000

55000

80000

105000

130000

155000

180000

205000

230000

FY08 Q1FY09 Q2FY09 Q3FY09 FY09 FY10E FY11E

(Rs Crore)

Saving Current Term

54.5 44.044.9 44.0 46.248.1

CASA %

40.0


CASA trending

downwards is a cause

for worry. However, we

believe this phenomenon

will be short lived andthe bank will again inch

up the CASA level in

FY10E and expect it to be

48% for FY11E


5/21

5 | P a g e

Reasons behind maintaining high CASA ratio for HDFC Bank

Diversified branch network: Almost 60% of the combined branches arelocated in the CASA rich northern and western regions of the country HDFC Bank mops up substantial free float generated by its transactionalbanking service like cash management, stock exchange clearing, plays therole of a banker to many IPOs, collecting banker to many mutual fund

schemes, correspondent banking service, salary accounts and tax collectionsExhibit 9:Branch distribution


Lower risk in CASA mobilisation, going ahead

The well-diversified resource mobilisation scatters the risk and mitigates theimpact of any one segment suffering on the overall CASA pie. However, in thenear term, integration of CBoP will lead to a lowering of CASA, as most of the

branches of CBoP are underutilised. This, coupled with an increase in demandfor term deposits, has pulled down the CASA in FY09.

The banking sector, as a whole, has substantially increased the rates ondeposits in H1FY09. This, in turn, has affected the CASA generating capacityas well as the margins of the bank across the sector. However, we believe abank like HDFC Bank will stand out as it has always maintained a leadershipposition in CASA accretion. This was quite evident from the FY09 resultswhere HDFC Bank reported a healthy CASA of 44% (consolidated figure),which is still very competitive in the industry.

Exhibit 10:CASA mobilisation: Trending down but still competitive

40 40

4643

38

3331 30

3532

31 31

55 58 54

44

48 48 47

39

20

30

40

50

60

FY06 FY07 FY08 FY09

(%)

Axis bank BOB BOI HDFC bank SBI


Though CASA is trending

downwards post merger,

HDFC Bank is still the

leader in the industry

There is no single big

contributor to CASA for

HDFC Bank. Hence, this

gives consistency and

lower risk, going ahead

HDFC Bank

18%

22%

32%

28%

Combined

16%

28%

28%

34%

CBoP

42%

16%

34%

8%

East South West North


6/21

6 | P a g e

Going forward: Further CASA generation from erstwhile CBOP branches

We believe there is a substantial opportunity for HDFC Bank to create value byshoring up the underleveraged CBoP branches. We expect these branches toscale up the operations by FY10E. Before merger, CBoP branches garneredonly 20% of the CASA garnered by HDFC Bank. However, the merged entity

reported CASA of 44% for FY09. Going ahead, we feel the bank will be able tocreate value by accumulating more CASA from erstwhile CBoP branches, thuskeep a check on cost of funds, and maintain NIMs (reported) above 4%.

Exhibit 11: CASA per branch: Scope for improvement

20.0

40.0

60.0

80.0

100.0

FY06 FY07 FY08A

(RsCrore).

HDFC Bank CBoP

Substantial scope for

improvement



7/21

7 | P a g e

Net Interest Income (NII) to grow at modest 15% CAGR over FY09-FY11E

We believe the well-balanced approach between the corporate and the retailbook coupled with the acquisition of CBoP will help the bank to witnessconsistent growth in the net interest income. We have forecast moderate 18%CAGR in NII over FY09-FY11E at Rs 10416 crore supported by advances and

deposits growth of 19% and 21% CAGR, respectively. The ability to garnerhigh CASA will help the bank to control its cost of funds and, thereby, helpthe bank in maintaining NIMs (reported) of over 4%.

Margins to be maintained around 4%

The bank has reduced its deposits rate by almost 150 bps in the recent pastand BPLR by just 50 bps. Lately, due to the high interest rate scenario demandfor term deposits was on the rise, which could have influenced NIMs for thebank. However, we believe a higher CASA ratio coupled with deposit rate cutsshould help in maintaining NIMs (calculated) above 4%, going ahead, as well.This will still be higher than the industry average of 3%.

Exhibit 12:NIMs (calculated) maintained above 4%

8.5

9.5 9.4 9.49.1

4.75.3

6.15.6 5.4

4.9 4.7 4.6

7.5

3.7

4.5 4.3

2

4

6

8

10

12


(%)

Yield on Advances Cost of Funds NIMs (calculated)


Exhibit 13:NII trending northwards

1,042 1,1631,438 1,642

5,228

1,723 1,867 1,979

7,421

9,074

10,416

1,000

3,000

5,000

7,000

9,000

11,000

Q1FY08 Q2FY08 Q3FY08 Q4FY08 FY08 Q1FY09 Q2FY09 Q3FY09 FY09 FY10E FY11E

(RsCrore)



8/21

8 | P a g e

Non-interest income: One of the key drivers of profitability

We expect non-interest income to grow at a moderate pace of 16% CAGRover FY09-FY11E to Rs 4393 crore. The main driver for non-interest income for HDFC Bank is commission and brokerage (CEB) income i.e. fee basedincome that the bank generates from the distribution of third-party products

like mutual funds and insurance, fees on debit/credit cards, transactionalcharges, processing fees of retail assets, cards and trade products and fromoriginating home loans for HDFC. The other arm, which contributes to otherincome, is profit on sale/revaluation of investment and foreign exchange andderivatives revenue.

The non-interest income grew @36% CAGR over FY06-09 fuelled by CEBgrowth of 33%for the same period. We expect the growth to moderate in thecoming years. We have modelled in modest 20% CAGR growth in CEB overFY09-FY11E to Rs 3539 crore.

Exhibit 14:Contribution of CEB to non-interest income

605

10451292

1715

2457

2949

3539

651

11241516

2283

3291

3797

4393

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

FY05 FY06 FY07 FY08 FY09 FY10E FY11E

(RsCrore)

.

Commission, Exchange, Brokerage Total

30% CAGR

20% CAGR


We expect some moderation in third-party distribution of mutual funds andinsurance products due to the slowdown in financial markets. So, we havemodelled in 20% CAGR over FY09-FY11E.

Exhibit 15:Third-party distribution of MF

21000

33000

45000

10000 20000 30000 40000 50000

Mutual Funds

(Rs crores) .

FY06 FY07 FY08


Exhibit 16:Third-party distribution of insurance

380

500

700

100 200 300 400 500 600 700 800

Insurance

(Rs crores) .

FY06 FY07 FY08



9/21

9 | P a g e

The merger of CBoP augurs well for HDFC Bank for the distribution businesssince the merger provides HDFC Bank with an expanded distribution networkand around 3 million additional customers. The remittance business is alsoexpected to pick up since around 114 branches of CBoP are located in Keralaand Tamil Nadu where the remittance business is comparatively high.

The bank originates home loans under its arrangement with HDFC withmonthly origination crossing Rs 550 crore by the end of March 2008. Weexpect lower origination growth for FY10E due to the slump in the retailsector to around Rs 600 crore on a monthly basis. The bank earns 1% as theorigination fee on the amount of origination for such arrangements. The bankalso has the right to exercise its option to take any part of 70% of the loanorigination into its books. The bank has not exercised this option anytime inthe previous years.

Exhibit 17:Cash settlement volumes on Indian bourses

30000

3800036000

0

5000

10000

15000

20000

25000

30000

35000

40000

FY06 FY07 FY08

(RsCrore).


Exhibit 18:Cash management volumes

1000012500

25000

0

5000

10000

15000

20000

25000

30000

FY06 FY07 FY08

(RsCrore).


HDFC Bank is one of the largest players in the cash management andsettlement business on stock and commodities exchanges in India. Thiscoupled with strong growth in the transaction banking vertical and well-diversified fee income supports well when there is some kind of moderationin financial activities. However, we believe HDFC Bank is performing well onall fronts like its multiple delivery channels, proper positioning and crossselling of products across the retail and corporate segments. The businessverticals of CBoP will also add to the non-interest income.


10/21

1 0 | P a g e

Asset quality to stabilise next year

Exhibit 19:A blip in asset quality post merger

1.21.3

1.5 1.6

1.92.0

2.7

2.5

0.4 0.4 0.40.5 0.6 0.6

0.6

1.1

0.9

1.2

0

0.5

1

1.5

2

2.5

3

FY06 FY07 FY08 Q1FY09 Q2FY09 Q3FY09 FY09 FY10E FY11E

(%)

GNPA NNPA


The asset quality of the bank is under pressure because of the CBoP merger,since the asset quality of CBoP was not as healthy as compared to HDFCBank. The reported figures for GNPA were 2.0% during FY09. On the otherhand, due to rising interest rates there was an upward pressure on NPA levelsacross the industry. On an immediate basis, stressed retail loan book maycause higher NPLs. Of these retail assets, personal loan and credit cards formonly 13% of the total advance book. We feel NNPA should stabilise in therange of 1.0-1.1% by the end of FY11E since loan loss provisioning for HDFCBank is always in the range of 70-75% for HDFC Bank.

Exhibit 20:Retail loan book for FY09

Auto

(Including

TW, CV),

42%

Personal,

15%

Business

Banking,

22%

others, 12%

Loan against

Sec, 2%Credit cards,

7%


sset quality of HDFC Bank is

deteriorating because of the

merger. CBoP had a big exposure

to the auto sector and mortgage

ortfolio. We, therefore, have

factored in higher NPA for FY10E

but prudent provisioning norms

will keep a check from FY11E

onwards

Total restructured assets as of

March 31, 2009 were Rs 120 crore

of which Rs 69 crore were already

classified as NPAs

In addition, applications received

for loan restructuring which were

yet to be approved or implemented

amounted to Rs 305 crore, of

which Rs 254 crore was classified

as NPAs.

Total standard assets which have

been restructured or where

restructuring is under

consideration were therefore,

0.1% of the banks gross advances

as of March 31, 2009


11/21

1 1 | P a g e

Merger with CBoP: Value accretive in the long run

Growth coupled with quality: Adhering to its philosophy, HDFC Bank went

on to acquire Centurion Bank of Punjab (CBoP) thereby creating the seventh

largest banking entity in India in terms of balance sheet size. The deal was a

share swap deal wherein 29 shares of CBoP fetched one share of HDFC

Bank. The deal amount and valuation offered took many by surprise. Inshort, the deal was EPS accretive in FY09 but will definitely be value

accretive from FY10E due to network expansion.

Modalities of the merger: The price paidNearly seven crore shares of HDFC Bank were allotted pursuant to a shareswap ratio of (1:29). This translated to one equity share of HDFC Bank of Rs 10each for every 29 shares of CBoP of Re 1 each, as on June 16 2008. Thus,HDFC Bank paid a sum of Rs 8050 crore to acquire CBoP, thereby valuing thelatter at 4.1x its 9MFY08 BV.Exhibit 21:Valuation matrixNo of shares (crore) 7.0

Closing price of HDFC Bank (16/06/2008)1151.0

Amount paid (crores) 8043.6

Book Value (Rs crores) 1963.3

No of times book value (x) 4.1 Source: Company, ICICIdirect.com Research

Exhibit 22:Dynamics : Business per branch

168

60

216

112

172

238

0

50

100

150

200

250

Business/ branch of HDFC

Bank

Business/ Branch of CBoP Expected business/branch

of the merged enitity

FY07 FY08 FY09 FY10E

Value

creation1+1 > 2


Branch valuation

Exhibit 23:Branch valuationNo of shares (crores) 7.0

Closing price as on 16/06/08 1151.0

Amount paid (Rs crores) 8043.6

No of Branches 394.0

Acquisition cost per branch (Rs crores) 20.4

Market Cap/branch of HDFC Bank (Rs crores) 53.5


The merger was EPS

dilutive in FY09 but is

expected to be EPS

accretive from FY10Eonwards


12/21

1 2 | P a g e

The amalgamation added significant value to HDFC Bank in terms ofincreased branch network, geographic reach and customer base and a biggerpool of skilled work force, which would have taken a few years to groworganically. This will help the bank to garner more retail deposits and thusreduce upward pressure on the cost of funds, which will be the key inchallenging times ahead.

The swap ratio turned out to be more positive for HDFC Bank than

expected. As we see it, it seems that HDFC Bank has paid higher to acquire

394 branches of CBoP. However, when we look at the acquisition cost per

branch as compared to what the market is valuing each HDFC branch at, it

accounted for only 38% of its value then. However, in our view all the under

leveraged branches of CBoP will shore up to HDFC Banks standard in

FY10E. Hence, the merger will be EPS accretive in FY10E. Until then it will

be dilutive.

Exhibit 24:Merged entity with a much wider reach

684

1605

316

761

1977

324

1229

2526

444

1412

2890

528

1412

3177

527

1412

3295

528

200

1200

2200

3200

4200

Branches ATM Cities

2007 2008 Q1FY09 (Post Merger) Q2FY09 Q3FY09 FY09


CBoP had 20% of total assets compared to the size of HDFC Bank by the endof December 2007, despite having 52% of the branches (394). The businessper branch was only 40% on a comparative basis for CBoP. However, in thefirst merged results, we can see that business per branch is closer to HDFCBanks level, which is where we see value creation. This was the trend in thenext two quarters as well.

Exhibit 25:Merger dynamics

Q1FY09 Q2FY09 Q3FY09 Q4FY09

Advances 71387 15083 21.1 96797 107820 100682 100239

Deposits 99387 20710 20.8 130918 133781 144862 142812

Total Assets 131439 25404 20.0 168598 171765 183185 183271

Branches 754 394 52.3 1221 1412 1412 1412

Business/branch 226 91 40.1 186 171 174 172

NIM (%) 4.3 3.6 - 4.1 4.2 4.3 4.2

CASA (%) 50.9 24.5 - 44.9 44.0 40.0 44.0

ParametersHDFC Bank

Q3FY08

CBoP

Q3FY08

CBoP as % of

HDFC Bk

Merged Results

Rs Crore



13/21

1 3 | P a g e

Risks & Concerns

Economic slowdown can affect growth and asset quality

RBI has shifted its focus from curbing inflation to economic stability andgrowth. Inflation, which was around 12-13% at the beginning of CY08 is nowagain in the low single digits. Despite recent rate cuts, we do not see a fastercredit off take, particularly private banks. Banks are hesitant to lend to certainsectors where stress is visible like real estate, gems & jewellery, exports,autos, textiles, etc. If the slowdown continues, the estimated business growthmay fall for system and for HDFC Bank as well.

In the slowing economic scenario, we can see some up tick in NPA levelsacross the industry. Retail as a percentage of total advances for HDFC Bank isaround 60%. This segment can suffer if we witness a further slowdown ingrowth and earnings.

Excessive dilution to drag RoEPost 2008, shareholders of CBoP were allotted 6.98 crore shares based on

swap ratio resulting in dilution of almost 20%. If we consider the conversionof warrants, already allotted to HDFC in FY10 then there will be further dilutionof 6% from these levels. Any further dilution, going ahead, for capitalrequirement may affect the RoEs adversely.

Risk of premium multiple shrinkingInability to maintain higher than industry CASA and deliver consistent profitsin future as delivered in the past may result in shrinking of premium multiplereceived by the bank.


14/21

1 4 | P a g e

Financials

Total net income growth pegged at 15% CAGR over FY09-FY11E

Net Interest Income (NII) and non-interest income has grown at 46% and 36%CAGR over FY07-09 period taking total income growth at same level. Goingahead, with pressure on advances growth and falling interest rates we

anticipate NII to grow at 18% CAGR over FY09-11E to Rs 10416 crore.However, lower treasury gains and fee income will result in moderate 16%CAGR growth in non-interest income leading to total net income growth of18% CAGR over the same period to Rs 14083 crore.

We have seen that more than 55% of the revenues came from traditionalbanking transaction that is interest income. CEB (fee income) as a percentageof total income is picking up momentum. On the expense side, operatingexpense contributed only at 32% of the total expenses, which shows costefficiencies built in the system for the bank. However, after the merger ofCBoP we have factored in that the operating cost will rise for the mergedentity in the coming years.

Exhibit 26:Rupee earned for FY08

Int from

advances, 56%

CEB, 14%

Profit on

Investment, 2%

Other int

income, 2%

Interest from

Investment,

23%

Forex, 3%


Exhibit 27:Rupee spent for FY08

Interest

Expense, 42%

Tax, 6%

Operating

Expense, 32%

Trans to

Reserve, 5%

Dividend, 3%

Provision, 13%


Profitability moderating

We revised PAT @25% CAGR during the next couple of years slightlymoderating from historical trend of 30%. The bank has reported a CAGR of38% in PAT for FY99-08. This shows the consistency with which the bank hasmade inroads into the under banked economy of India. We expect provisionsto rise steeply by 66% in FY09E due to CBOP merger and its old NPAs. Weexpect the banks prudent growth norms to keep provisioning under control

and, hence, bring bottomline growth back on track.Exhibit 28:PAT growth: to moderate in the coming year

82 120 210297 387

509 665870

11411590

2245

2809

3497

0

1000

2000

3000

4000

FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E

(RsCrore)

CAGR @44%



15/21

1 5 | P a g e

Payout ratio

The EPS for the bank has been on the rise right from FY98 when the bankreported EPS of Rs 4.1. By the end of FY08, it went all the way to Rs 46.2. Thegrowth for the bank was always steady and the payout ratio for the bank hasalways been in the range of 20-25%. We feel dividend payout ratio will stay atcurrent levels to keep a balance between growth and returns to shareholders.

Exhibit 29:Movement in EPS, DPS & payout ratio

22.927.9

36.3

46.252.8

62.3

77.6

4.5 5.5 7.08.5

12.6 13.016.2

24.0

22.223.9

20.9 20.9

22.6

22.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

FY05 FY06 FY07 FY08 FY09 FY10E FY11E

(Rupees)

.

10

15

20

25

30

(%)

EPS DPS Payout ratio (RHS)


Return on assets consistently above 1%

HDFC Bank has been maintaining return on assets around 1.3-1.4% for thepast three years. However, because of the merger with CBoP we have seenthe RoA coming down to 1.2% for FY09. However, as synergies creep into thesystem, we believe it will again pick up to 1.4% for FY10E and improve further

to 1.5% in FY11E.

Exhibit 30:RoA: To pick up post FY09E

1.41.3 1.3

1.2

1.51.4

0

0.5

1

1.5

2


(%)

Because of

merger of CBoP

Once Synergies

creep in by

shoring upbranches



16/21

1 6 | P a g e

Valuations

HDFC Bank has been historically registering a growth of more than 30% in itsbottomline. The bank has been maintaining higher than industry average

NIMs (reported) at above 4%. The major reason is a well-diversified loan bookcoupled with the ability to maintain and sustain higher than average CASAdeposits (near 50%). Also, with adequate multiple distribution channels andeffective cross selling of products the bank has been able to gain traction onthe fee income side. These factors, along with its able management haveenabled the bank to command a premium multiple, as it has always traded at3x-3.5x on a rolling one-year forward P/ABV multiple.

At the CMP of Rs 1366, the bank is trading at 3.1x and 2.9x its FY10E andFY11E ABV, respectively. We expect HDFC Bank to be able to generate RoEsin the range of 15-16% over the next two years. After considering threepossible scenarios of capital raising via warrants conversion (Exhibits 31-33),

we value the bank at a conversion price of Rs1510. Thereby, we have arrivedat FY11E fair ABV of Rs 478. We value the stock at 3.0x FY11E ABV to arrive ata target price of Rs 1434. We recommend HOLD on the stock

Alternative scenario IExhibit 31:If conversion of warrants takes place @ Rs 1520 as stipulated

FY2008 FY2009 FY2010E FY2011E

Basic EPS 44.9 52.9 62.3 77.6

Diluted EPS 44.9 52.9 62.3 77.6

Book value per share 324.4 351.1 467.2 509.1

Normal ABVPS 316.0 327.3 438.6 478.7

P/PPP 13.2 11.5 9.5 8.0

P/E 31.2 26.5 22.5 18.0P/BV 4.3 4.0 3.0 2.7

P/ABV 4.4 4.3 3.2 2.9

DPS 8.0 12.6 13.0 16.2


Alternative scenario IIExhibit 32:If conversion of warrants takes place @ Rs 1100/share instead of Rs 1520

FY2008 FY2009 FY2010E FY2011E

Basic EPS 44.9 52.9 62.3 77.6

Diluted EPS 44.9 52.9 62.3 77.6


Normal ABVPS 316.0 327.3 413.6 453.7

P/PPP 12.9 11.2 9.3 7.8

P/E 30.5 25.9 22.0 17.7

P/BV 4.2 3.9 3.1 2.8

P/ABV 4.3 4.2 3.3 3.0

DPS 8.0 12.6 13.0 16.2


Our drawing of the alternative scenarios I, II and III hinges on the weak capital marketsthat may lead to either the lapse of conversion warrants or a repricing of the same.


17/21

1 7 | P a g e

Alternative scenario IIIExhibit 33:If HDFC denies conversion of warrants in FY10E

FY2008 FY2009 FY2010E FY2011E

Basic EPS 44.9 52.9 66.2 82.4

Diluted EPS 44.9 52.9 66.2 82.4


Normal ABVPS 316.0 327.3 371.0 413.7P/PPP 12.9 11.2 8.8 7.4

P/E 30.5 25.9 20.7 16.6

P/BV 4.2 3.9 3.4 3.1

P/ABV 4.3 4.2 3.7 3.3

DPS 8.0 12.6 13.8 17.2


Exhibit 34:Peer set comparisonP/E (x) P/ABV (x) ROE(%) P/E (x) P/ABV (x) ROE(%) P/E (x) P/ABV (x) ROE(%)

HDFC Bank 25.9 4.2 10.5 22.0 3.1 15.6 17.7 2.9 15.9

Axis Bank 14.9 2.7 19.1 12.9 2.4 18.9 10.9 2.0 19.1

Yes Bank 12.8 2.4 20.7 10.3 1.9 20.3 8.6 1.6 20.4

BOI 5.6 1.5 24.5 5.1 1.2 22.3 4.4 1.0 21.4

FY09 FY10E FY11E

Source: ICICIdirect.com Research

Exhibit 35:RoE decomposition(%) FY08 FY09 FY10E FY11E

Net interest income/ Avg. assets 4.7 4.3 4.6 4.5

Non-interest income/ Avg. assets 2.0 1.7 1.9 1.9

Net total income/ Avg. assets 6.7 6.0 6.5 6.4

Operating expenses/ Avg. assets 3.3 3.5 3.2 3.0

Operating profit/ Avg. assets 3.4 2.5 3.4 3.4

Provisions/ Avg. assets 1.3 1.2 1.3 1.2

Return on Avg. assets 1.4 1.3 1.4 1.5

Leverage (Avg assets/ Avg equity) (x) 12.5 12.0 12.4 12.8

Return on equity 17.7 17.0 17.6 19.4

Source: ICICIdirect.com Research


18/21

1 8 | P a g e

Exhibit 36:Financial performanceProfit and Loss Account Rs. Crore

FY08 FY09 FY10E FY11E

Interest Earned 10115.0 16332.3 18001.2 20496.0

Interest Expended 4887.1 8911.1 8927.3 10080.2

Net Interest Income 5227.9 7421.2 9073.9 10415.8

Growth (%) 50.7 42.0 22.3 14.8Non Interest Income 2283.2 3290.6 3796.7 4392.5

Net Income 7511.0 10711.8 12870.6 14808.3Employee cost 1301.4 2055.6 2480.7 2721.4

Other operating Exp. 2444.3 3477.2 3751.3 4201.7

Operating Income 3765.4 5179.0 6638.6 7885.3Provisions 1484.8 1879.7 2537.7 2780.2

PBT 2280.6 3299.3 4100.9 5105.1Taxes 690.5 1054.3 1291.8 1608.1

Net Profit 1590.2 2245.0 2809.1 3497.0

Growth (%) 39.3 41.2 25.1 24.5

Balance Sheet Rs. Crore

FY08 FY09 FY10E FY11ELiabilitiesCapital 354 425 425 425

Reserves and Surplus 11143 14486 16621 18509

Networth 11497 14911 17045 18934Deposits 100769 142736 168228 202282

Borrowings 4479 6885 5990 6238

Subordinated Debt 3249 5227 5427 5927

Other Liabilities & Provisions 13183 13769 15145 16659

Total 133177 183527 211835 250040

Assets

Fixed Assets 1175 1558 1714 1751

Investments 49394 65661 76481 85116

Advances 63427 100256 119916 145757

Other Assets 4403 3031 1532 3076

Cash with RBI & call money 14778 13022 12192 14340

Total 133177 183527 211835 250040



19/21

1 9 | P a g e

Exhibit 37:RatiosFY08 FY09 FY10E FY11E

Valuation

No. of Equity Shares 35.4 42.5 42.5 42.5

EPS (Rs.) 44.9 52.9 66.2 82.4BV (Rs.) 324.4 351.1 401.4 445.9

BV-ADJ (Rs.) 316.0 327.3 371.0 413.7

P/E 30.5 25.9 20.7 16.6

P/BV 4.2 3.9 3.4 3.1

P/adj.BV 4.3 4.2 3.7 3.3

Div. Yield (%) 0.6 0.9 1.0 1.3

DPS (Rs.) 8.0 12.6 13.8 17.2

Yields & Margins (%)

Yield on avg int earning assets 9.5 9.8 9.3 9.1

Avg. cost on funds 5.3 5.9 5.3 5.1

Net Interest Margins (calculated) 4.9 4.4 4.7 4.6

Avg. Cost of Deposits 5.2 5.7 5.2 5.0Yield on average advances 12.6 12.3 11.8 11.3

Profitabilty (%)

Interest expense / total avg. assets 4.4 5.6 4.5 4.4

Interest income/ total avg. assets 9.0 10.3 9.1 8.9

Non-interest income/ avg. assets 2.0 1.7 1.9 1.9

Non-interest income/ Net income 30.4 30.7 29.5 29.7

Net-interest income/ Net income 69.6 69.3 70.5 70.3

Cost / Total net income 49.9 55.1 48.4 46.8

Quality and Efficiency

Credit/Deposit ratio 62.9 70.2 71.3 72.1

GNPA (%) 1.4 2.4 2.7 2.5NNPA (%) 0.5 1.0 1.1 0.9

RONW (%) 17.7 17.0 17.6 19.4

ROA (%) 1.4 1.3 1.4 1.5



20/21

2 0 | P a g e

GlossaryCash reserve ratio (CRR): Every scheduled commercial bank was required to maintain with the RBIevery fortnight a minimum average daily cash reserve equivalent of 5% of its net demand and timeliabilities (NDTL) outstanding as on the Friday of the previous week.

Current account savings account (CASA): It is the proportion of current account and savings accountdeposits in total deposits.

Net interest margin (NIM) It is the ratio of banks net interest income to its interest earning assets. Itbasically depicts banks net interest earning capability from the assets deployed.

Held-to-Maturity (HTM) Investments that the bank intends to hold till maturity.

Available for Sale (AFS) - Investments that are available for sale anytime after 90 days from the date ofpurchase.

Capital Adequacy Ratio (CAR) Capital adequacy is determined as a ratio of capital funds to total riskweighted assets of the bank. Currently, the minimum CAR to be maintained is 9%.

Non-performing assets (NPA) These are advances where the principal and interest is not paid byborrower for 90 days.

Net NPA = Gross NPA Provisions

CAGR Compounded annual growth rate

Net interest income (NII)Total interest income less total interest expense

Adjusted book value (ABV) Book value per share less NNPA

Dividend per share (DPS) Dividend declared pr share


21/21

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations.ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. currentmarket price and then categorises them as Outperformer, Performer, Hold, andUnderperformer. The performance horizon is two years unless specified and the notional targetprice is defined as the analysts' valuation for a stock.

Outperformer (OP): 20% or more;Performer (P): Between 10% and20%;Hold (H): +10% return;Underperformer (U): -10% or more;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,Gr. Floor, Mafatlal House,163, HT Parekh Marg,Backbay Reclamation

Churchgate,Mumbai 400 020

[email protected]

ANALYST CERTIFICATIONWe /I, Kajal Jain CA Chirag Shah PGDBM (Finance) Viraj Gandhi MBA (CM) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressedin this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directlyor indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICISecurities Inc.

Disclosures:ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along withaffiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship

with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and otherbusiness selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in thesecurities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictlyconfidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media orreproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiariesand associated companies, their directors and employees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory,compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and suchsuspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or incertain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completenessguaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribefor securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will nottreat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment orstrategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make theirown investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise ofindependent judgement by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interestrates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performanceis not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual

results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might havereceived compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings,corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companiesmentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investmentbanking or other advisory services in a merger or specific transaction. It is confirmed that Chirag J Shah, PGDBM; Kajal Jain, CA, Viraj Gandhi (MBA CM) research analysts and the authorsof this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on theprofitability of ICICI Securities, which include earnings from Investment Banking and other business.

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding thepublication of the research report.

It is confirmed that Viraj Gandhi (MBA CM),Chirag J Shah, PGDBM; Kajal Jain, CA research analysts and the authors of this report or any of their family members does not serve as anofficer, director or advisory board member of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may actupon or make use of information contained in the report prior to the publication thereof.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, wheresuch distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement withinsuch jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may

come are required to inform themselves of and to observe such restriction.

This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical information, it is believed tobe reliable, although its accuracy and completeness cannot be guaranteed.

Date post:	07-Apr-2018
Category:	Documents
Upload:	ishanm
View:	217 times
Download:	0 times

ICICIdirect HDFCBank Report

Documents