hdfc bank_rishabh bhandari

8/8/2019 HDFC Bank_Rishabh Bhandari

1/4

25TH

November, 2010 Banking , Financial Services & Insura

HDFC Bank RECOMMENDATION: BUYSEARCH REPORT

Recommendation

Rating Buy

Target 2514

Target period 12 months

Potential upside 9.3%

Key Financials

n `Cr FY09 FY10 FY11E FY12E

NII 7421 8387 10523 13552

PAT 2245 2949 3915 5490

PS(`) 52.8 64.4 85.5 119.9

Valuation

n `Cr FY09 FY10 FY11E FY12E

NP 2245 2949 3915 5490

P/E 39 32 24 17.1

P/BV 5.9 4.4 3.8 3.3

RoA 1.4 1.5 1.6 1.7

RoE 16.9 16.1 17 20.6

Stock Information

Mkt. Cap Rs 1,109,535mn

52week H/L Rs. 2540/1549

Beta 0.9

3M avg. Daily volume 1 mn

CMP 2295

ice Performance1M 3M 12m

Absolute -0.1 17.6 40.8

Relative -2.9 4.7 21.0

Student Analyst

Rishabh [email protected]

91-9892904200

Investment rationale:

HDFC Banks strong and profitable growth over the last five years (FY2005was supported by significant traction in CASA market share (from 3.3%

FY2005 to 5.2% in FY2010). The banks dominant transaction banking busin

lies at the core of the banks strength in CASA deposits. Moreover, the merof CBoP expanded the banks branch network by a 30% CAGR during FY200

10. By increasing CASA mobilisation at branches, leveraging its comprehens

product range and strong brand, I believe HDFC Bank would be in a position

extract substantial operating leverage, improve NIM and cross-sell

Apart from traditional CEB and Forex income, the bank earns substantial fincome from transaction banking, cards and third-party distribution, amo

others. Overall, core fee income grew at a 30% CAGR over FY200810; and

about 1.7% of ATA in FY2010, it was one of the best in the sector and mark

another significant competitive advantage over peers benefits.

The banks capital adequacy stood at 16.3%, with Tier-1 comprisingsubstantial 76.1% share. I expect capital adequacy to remain strong over tnext two years, which is ideal in the current environment

Key Highlights

A strong 7.7% QoQ growth in core operating profit without diluting asquality (Gross NPA ratio stands at 1.2%) was the highlight of Q2FY2011 resu

This is way ahead of industry, which is around 2.8%. The net profit grew

32.7% YoY.

The NII has grown by strong 5.2% QoQ where the main driver was growthadvances by 32% keeping NIMs stable

Improved market share in advances(4.6%) and deposits(4.1%). CASA improvby over 140 basis to 50.61%

Valuation & Outlook

I believe HDFC Bank is among the most competitive banks in the sector, with an A

management team that has one of the best track records in the sector. At the CM

the stock is trading at 17.1x FY2012E EPS of Rs119.9 and 3.3x FY2012E ABV of Rs6

believe HDFC Bank is once again positioned for a high qualitative growth trajecto

with the CASA and cost-to-income ratios returning to pre-CBoP levels. In my view

its strong capital adequacy and substantial branch expansion, the bank is set to fu

gain CASA market share and achieve strong growth in fee income, as the econom

environment continues to improve. HDFC Bank has commanded a 32.8 premium

Sensex in terms of its oneyear forward P/E multiple over the last five years. I expe

the premium to be around its historical average on account of the banks robust

growth and RoE prospects over the next two years. On the basis of the increase i

Sensex valuations and my 17x target FY2012E P/E multiple for the Sensex, I am al

increasing my target multiple for HDFC Bank. I now value the stock at 4.0x FY2012

ABV of Rs629 to arrive at a target price of Rs2,514, implying an upside of 23%. He

recommend a Buy on the stock
mailto:[email protected]:[email protected]:[email protected]


2/4

FC BANK

November, 2010

rong growth in advances was led by

holesale advances which grew by 7.4%

oQ. The proportion of wholesale

dvances in total advances stood at 48%.

espite strong growth in advances, the

ASA was maintained at 50.6% for the

uarter, an expansion of 28bps YoY

he other income declined by 4.6% yoy

uring the quarter due to treasury losses

Rs521mn during the quarter comparedgains of Rs1.6bn in Q2FY10. The fee

come grew by 15% qoq.

et Interest Income in line with

xpectations - HDFC Banks NII has grown

y 29.2% YoY to Rs25.3bn driven by 38%

oY growth in advances (7.4% QoQ) and

able NIMs

Key Investment arguments

Advances Mix

Rs Bn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ(%) % of t

Retail

advances 627 663 720 761 820 30.8 7.7

Wholesale

advances 510 534 539 702 751 47.3 7.1

Total 1,137 1,196 1,258 1,462 1,571 38.2 7.4

CASA Mix

Rs Bn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ(%

Savings Deposits 322 333 372 362 394 22.3 8.8

Current Deposits 432 467 499 539 595 37.6 10.5

CASA 754 800 871 900 989 31.1 9.8

Term Deposits 744 748 803 930 964 29.6 3.7

Total Deposits 1,498 1,548 1,674 1,830 1,953 30.4 6.7

CASA (%) 50.3 51.7 52 49.2 50.6 28bps 144bps

Fee Based Income

Rs Mn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) Q

Fee/Commission

income 6,924 7,237 7,653 7,457 8,570 23.8 1

Trading gains/(losses) 1,629 -265 -473 224 -521

Others 1,519 1,558 1,856 1,718 1,558 2.6 -

Total 10,072 8,530 9,036 9,399 9,607 -4.6 2

Yield analysis% Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 QoQ

Yield on advances 11.1 10 9.9 9.7 9.7 -5Yield on Investments 6.5 6.5 6.6 7.1 7.1 1

Yield on Assets 8.4 8.1 7.6 7.8 8 20

Cost of funds 4.3 3.6 3.2 3.5 3.8 24

NIM (Reported) 4.2 4.2 4.4 4.3 4.2 -10


3/4

FC BANK

November, 2010

aintained Asset quality but non-interest

come growth an issue

No surprises on asset quality, non-interest income growth a concern GNPA @1.2%

NNPA @ 0.3% as against 1.8% GNPA and 0.5% NNPA in Q2FY10 looks very health

NPA provision coverage ratio (excluding write-offs) stands at 78%. Total cumulati

restructured assets were at 0.3% of the banks gross advances, which is the lowes

the industry. The bank reported a fourth consecutive dip in non-interest income t

961 crore. MTM hit of Rs 52 crore in Q12FY11 against profit of Rs 151 crore in Q2

was a drag.

Key Financials

Particulars FY2009 FY2010 FY2011E FY2012E

NII (Rs. Cr 7421 8387 10523 13552

% Chg 42 13 25.5 28.8

Net profit (Rs. Cr) 2245 2949 3915 5490

% Chg 41.2 31.3 32.8 40.2NIM (%) 4.9 4.3 4.3 4.4

EPS (Rs.) 52.8 64.4 85.5 119.9

P/E (x) 39 32 24 17.1

P/ABV (x) 5.9 4.4 3.8 3.3

RoA (%) 1.4 1.5 1.6 1.7

RoE (%) 16.9 16.1 17 20.6

Investment Concerns

Provisioning risks: Given the risks of restructured loans being unrecoverable, thepossibility of incremental slippages in asset quality cannot be ruled out. There ma

be cases of standard assets deteriorating to doubtful or loss assets for banks that

otherwise have adequate risk provisions. In order to sustain a low net NPA ratio,

Bank may have to provide higher for additional slippages in its asset book. While

bank had NPA coverage ratio of 78% at the end of September 2010 (well above R

mandate of 70%), we have provided for any contingent liabilities on these accoun

my forward estimates.

Fee income support: lagging Fee support may weaken: Although HDFC Bank has

able to sustain its fee income to total income ratio at above 25% over the last 5financial years, the proportion of the same may not be sustained going forward.

This can primarily be attributed to the fact that the bank has been losing share in

management services to new players in the industry and at the same time not ab

catch up on alternative fee income streams. As a result, smaller players like Axis B

and Yes Bank have surpassed it in terms of fee income contribution to total incom

lower treasury gains in a rising interest rate scenario may reduce the proportion o

fund based income to total income.


4/4

FC BANK

November, 2010

mparison with peers: (Q2FY10)

Axis Bank HDFC Bank ICICI Bank

Kotak

Mahindra

Bank

YES Bank Andhra BoB BoI Canara

n-Interest Income 18% 16% 14.30% 23% -2.96% 25.36% 14.40% -13.53% -

t Interest Income 40.50% 29.20% 8.30% 24% 77.90% 52.04% 46.80% 26.14% 52.50%

vances 36.50% 32.00% 5.30% 40% 86.30% 26.64% 29.60% 22.36% 20.20%

posits 35.72% 30.40% 11% 50.00% 106.60% 26.18% 30.10% 20.57% 21.00%

t profit 38% 32.70% 21.80% 55% 57.80% 10.58% 60.70% 90.00% 10.70%

t Interest Margin 3.30% 4.20% 2.60% 5.60% 3% 3.91% 3.02% 2.81% 3.16%

dit-Deposit Ratio 76% 68% 75.80% 76.86% 85% 73% 72.26%

SA Ratio 41.55% 50.60% 44% 29% 10.10% 30.40% 35.89% 33% 30%

R-Basel 2 (%) 13.68% 17% 20.20% 19.40% 19.40% 12.41% 13% 13.04% 13.88%

ss NPA (%) 1.12% 1.16% 5.03% 1.82% 0.22% 1.26% 0.38% 2.64% 1.49%

t NPA (%) 0.34% 0.30% 1.37% 0.68% 0.06% 0.49% 1.39% 1.04% 1.06%

vision Coverage Ratio 80.17% 77.80% 69% 70.10% 78.43% 78.85% 74.90% 70% 77.06%

A 1.50% 1.60% 1.31% 1.76% 1.50% 1.37% 1.34% 0.87% 1.52%

t to Income Ratio 43.90% 47.50% 41% 75.70% 36.60% 42.06% 39.08% 42% 40.73%

23 38.57 27.95 22.69 18.61 8.3 11.8 14.6 10.6

V 3.9 5.6 2.54 2.4 3.2 1.9 2.3 1.9 2.5

t of Funds 4.75% 3.80% 5.80% 5.60% 6.70% 5.25% 5.65%

erest Income as % Working Funds 7.73% 8.39% 7.19% 9.96% 8.89% 8.59% 6.86% 7.14% -

erating Profit as % Working Fund 3.48% 3.33% 2.72% 3.97% 2.75% 2.35% 2.03% 1.88% -

A 1.50% 1.60% 1.31% 1.72% 1.50% 1.37% 1.34% 0.87% 1.52%

iness per Employee 111,100,000 59,000,000 102,900,000 48,700,000 152,670,000 92,500,000 91,400,000 102,800,000 106,000,000 63

fit per Employee 1,200,000 598,000 1,200,000 700,000 1,575,000 899,000 600,000 1,333,000 736,000

Yield Measurement Ratios

Balance She et Ratios

Asset Quality Ratios

Profitability Ratios

Efficiency Ratios

Valuations

Others

Business Ratios

Growth ratios

orecasts FY06 FY07 FY08 FY09 FY10 FY11E FY12

articulars % FY2011E FY2012E Valuation Ratios

redit Growth 26 27 PER (x) 73.7 57.4 45.7 38.9 31.8 24 17

eposit Growth 27 26 P/ABVPS (x) 12.2 10.2 6.4 5.8 4.4 3.8 3

ASA Ratio 52.2 52Dividend

yield 0.3 0.3 0.4 0.4 0.6 0.8 1

IMs 4.3 4.4 DuPont Analysis

ther Income Growth 12.5 28.1 NII 4.1 4.5 4.7 4.7 4.1 4.2 4

rowth in staff expenses 30 29.2 (-) Prov. Exp 1.3 1.4 1.3 1.2 1.1 0.8 0

rowth in other expenses 20 29.2 Adj. NII 2.8 3.1 3.4 3.5 3.1 3.4 3

ippages 1.7 1.5 Treasury 0.1 -0.1 0.1 0.3 0.2 0

overage ratio 86.4 86.4 Int. Sens 2.8 3 3.6 3.7 3.2 3.4 3reasury gains/losses 0.1 0.1 Other Inc 1.9 1.9 1.8 1.9 1.7 1.7 1

Op. Inc 4.7 4.9 5.4 5.7 5 5.1 5

Opex 2.7 2.9 3.3 3.6 2.8 2.8 2

PBT 2 2 2 2.1 2.1 2.3 2

Taxes 0.6 0.6 0.6 0.7 0.7 0.7 0

RoA 1.4 1.4 1.4 1.4 1.5 1.6 1

Leverage 12.7 14 12.5 11.9 11.1 11

RoE 17.7 19.5 17.7 16.9 16.1 17 20

hdfc bank_rishabh bhandari

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