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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
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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
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
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
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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
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
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
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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)
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
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
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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
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
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
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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
Source: Company, ICICIdirect.com Research
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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
FY06 FY07 FY08 FY09 FY10E FY11E
(%)
Yield on Advances Cost of Funds NIMs (calculated)
Source: Company, ICICIdirect.com Research
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)
Source: Company, ICICIdirect.com Research
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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
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
Exhibit 16:Third-party distribution of insurance
380
500
700
100 200 300 400 500 600 700 800
Insurance
(Rs crores) .
FY06 FY07 FY08
Source: Company, ICICIdirect.com Research
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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).
Source: Company, ICICIdirect.com Research
Exhibit 18:Cash management volumes
1000012500
25000
0
5000
10000
15000
20000
25000
30000
FY06 FY07 FY08
(RsCrore).
Source: Company, ICICIdirect.com Research
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.
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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
Source: Company, ICICIdirect.com Research
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%
Source: Company, ICICIdirect.com Research
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
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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
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
The merger was EPS
dilutive in FY09 but is
expected to be EPS
accretive from FY10Eonwards
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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
Source: Company, ICICIdirect.com Research
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
Source: Company, ICICIdirect.com Research
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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.
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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%
Source: Company, ICICIdirect.com Research
Exhibit 27:Rupee spent for FY08
Interest
Expense, 42%
Tax, 6%
Operating
Expense, 32%
Trans to
Reserve, 5%
Dividend, 3%
Provision, 13%
Source: Company, ICICIdirect.com Research
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%
Source: Company, ICICIdirect.com Research
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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)
Source: Company, ICICIdirect.com Research
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
FY06 FY07 FY08 FY09 FY10E FY11E
(%)
Because of
merger of CBoP
Once Synergies
creep in by
shoring upbranches
Source: Company, ICICIdirect.com Research
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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
Source: Company, ICICIdirect.com Research
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
Book value per share 324.4 351.1 442.2 484.1
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
Source: Company, ICICIdirect.com Research
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.
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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
Book value per share 324.4 351.1 401.4 445.9
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
Source: Company, ICICIdirect.com Research
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
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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
Source: Company, ICICIdirect.com Research
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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
Source: Company, ICICIdirect.com Research
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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
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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
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