HDFC Bank ACCUMULATE. Performance Highlights. CMP `2,348 Target Price `2,671. 4QFY2011 Result Update Banking. Key financials

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1 4QFY2011 Result Update Banking April 19, 2011 HDFC Bank Performance Highlights Particulars (` cr) 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) NII 2,839 2, , Pre-prov. profit 2,097 2, , PAT 1,115 1, For 4QFY2011, HDFC Bank reported healthy 33.2% yoy growth in net profit to `1,115cr, in line with our estimate of `1,110cr. The bank continued to maintain healthy operating performance with strong profitability growth. We maintain our Accumulate recommendation on the stock. Consistently healthy performance on all parameters: Overall business growth of the bank was healthy for 4QFY2011 despite a typical fourth quarter slowdown in advances. The bank was able to maintain its reported NIM at 4.2% despite the rising cost of funds for the system as a whole. Over the past few quarters, the bank has been witnessing a slowdown in saving account deposit growth, which came down to 27.2% in 4QFY2011 from 42.8% in 4QFY2010. Despite this, the bank s CASA ratio remained the best in the industry at 52.7% (51% after adjusting for one-offs). The asset quality continued to improve substantially with slippages halving from 2.6% in FY2010 to 1.1% in FY2011 and provisioning expenses to average assets declining to 0.8% in FY2011 from 1.1% in FY2010. NPA coverage improved further to 82.5%, even without considering the strong floating provisions (accounting for over 53.4% of provisioning expenses during the quarter). The bank currently has an outstanding floating provision pool of ~`730cr, building a cushion against future asset-quality pressures. Outlook and valuation: At the CMP, the stock is trading at 3.2x FY2013E P/ABV, which is below our target multiple of 3.6x (benchmarked at ~25% premium to our Sensex target multiple). We believe HDFC Bank is well positioned for high qualitative growth, with CASA and cost-to-income ratio returning to pre-cbop levels. In our view, with strong capital adequacy and healthy branch expansion, the bank is set to further gain credit and CASA market share accompanied by reduction in NPA provision costs. We maintain our Accumulate recommendation on the stock with a target price of `2,671. Key financials Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E NII 8,387 10,544 12,957 16,177 % chg Net profit 2,949 3,926 5,134 6,731 % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) ACCUMULATE CMP `2,348 Target Price `2,671 Investment Period Stock Info Sector 12 Months Banking Market Cap (` cr) 1,09,237 Beta Week High / Low 2,518/1,785 Avg. Daily Volume 74,384 Face Value (`) 10 BSE Sensex 19,122 Nifty 5,741 Reuters Code Bloomberg Code Shareholding Pattern (%) HDBK.BO HDFCB@IN Promoters 23.4 MF / Banks / Indian Fls 11.6 FII / NRIs / OCBs 47.2 Indian Public / Others 17.9 Abs. (%) 3m 1yr 3yr Sensex HDFC Bank Vaibhav Agrawal Ext: 6808 vaibhav.agrawal@angelbroking.com Shrinivas Bhutda Ext: 6845 shrinivas.bhutda@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 4QFY2011 performance Particulars (` cr) 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) Interest earned 5,469 5, , on Advances / Bills 4,151 3, , on investments 1,297 1, , on balance with RBI & others (64.0) on others Interest Expended 2,629 2, , Net Interest Income 2,839 2, , Other income 1,256 1, Other income excl. treasury 1,247 1, Fee & commission income 1, Treasury income 9 (31) NA (47) NA - Forex & derivative income Operating income 4,095 3, , Operating expenses 1,998 1, , Employee expenses Other Opex 1,265 1, Pre-provision Profit 2,097 2, , Provisions & Contingencies (7.4) 440 (1.9) - Floating and NPA Provisions (24.6) Other Provisions (13.6) PBT 1,666 1, , Provision for Tax PAT 1,115 1, Effective Tax Rate (%) bps bps Exhibit 2: 4QFY2011 Actual vs. estimates Particulars (` cr) Actual Estimates Var. (%) Net interest income 2,839 2,878 (1.3) Other income 1,256 1, Operating income 4,095 3, Operating expenses 1,998 1, Pre-prov. profit 2,097 2, Provisions & cont PBT 1,666 1, Prov. for taxes PAT 1,115 1, April 19,

3 Exhibit 3: 4QFY2011 performance analysis Particulars 4QFY11 3QFY11 % chg (qoq) 4QFY10 % chg (yoy) Balance sheet Advances (` cr) 159, , , Deposits (` cr) 208, , , Credit-to-Deposit Ratio (%) bps bps Current deposits (` cr) 46,460 36, , Saving deposits (` cr) 63,448 61, , CASA deposits (` cr) 109,908 97, , CASA ratio (%) bps bps CAR (%) bps bps Tier 1 CAR (%) bps bps Profitability Ratios (%) Reported NIM bps bps Cost-to-income ratio bps bps Asset quality Gross NPAs (` cr) 1,694 1,782 (4.9) 1,817 (6.7) Gross NPAs (%) bps bps Net NPAs (` cr) (10.4) 392 (24.4) Net NPAs (%) bps bps Provision Coverage Ratio (%) bps bps LLP & floating prov. to avg. assets (%) bps bps Advances growth moderates sequentially in line with historical trend; NIM sustained at 4.2% Growth in net advances of the bank moderated considerably to just ~0.5% qoq (~1.5% after adjusting for sell-downs of ~`1,500cr during the quarter), which is typical of HDFC Bank s fourth quarter growth strategy. On a yoy basis, the bank s advances continued to grow (27.1%) at a faster pace than the industry s growth (~21.4%), leading to credit market share gains. Deposits accretion was strong during the quarter with growth of 8.5% qoq primarily on account of year-end surge in current account deposits (accounting for ~63.7% of incremental deposits). On a yoy basis, deposits growth was healthy at over 24% compared to industry growth of ~16%. CASA deposits continued to be a strong source of funding for the bank, accounting for 54.7% of incremental deposits for FY2011. Saving account deposit growth has been moderating in the recent quarters (down from the peak of 42.8% as of 4QFY2010 to 27.2% as of 4QFY2011). However, overall CASA ratio remains the best in the industry at 51% (after adjusting one-offs; 52.7% without adjusting). The bank delivered reasonable growth in other income, as reflected in 23.2% yoy growth in fees and commission income and 36.3% rise in forex and derivative income. The bank was able to sustain its reported NIM at 4.2% sequentially despite rising cost of funds for the system as a whole, primarily on the back of a 120bp hike in its base rate during the quarter. Going forward also, we expect the bank to largely sustain its NIM close to FY2011 levels on the back of its strong funding mix. April 19,

4 Exhibit 4: Advances growth moderates (%) 4QFY10 1QFY11 2QFY11 3QFY11 4QFY Exhibit 5: Stable margins (%) Advances Deposits QFY10 1QFY11 2QFY11 3QFY11 4QFY11 Strong capital adequacy, branch expansion to drive credit and CASA market share gains, respectively The bank s total capital adequacy ratio (CAR) remained strong at 16.2%, with tier-1 constituting 74.8% of the total CAR. On the back of this strong CAR, we expect the bank to further improve its credit market share over FY Accordingly, we expect the bank to record credit growth of 28% each for FY2012 and FY2013 compared to 27.1% growth in FY2011. Importantly, the bank s CASA deposits also grew by 26.2% yoy, driven by 27.2% yoy growth in savings deposits. The strong traction in CASA growth over the past one year can be attributed to the bank s aggressive branch expansion during FY and increasing productivity of CBoP s branch network. During FY2011, the bank added 261 branches, taking its branch network close to 2,000, which was lower compared to 313 branches opened in FY2010. However, the bank has increased its presence to ~1,000 cities compared to 779 cities as of FY2010. In FY2012, the bank plans to increase its branch network by 12 13% by opening ~250 branches, which appears to be a bit on the lower side. Exhibit 6: CASA ratio remains strong Tier-I CAR (%) Tier-II CAR (%) QFY10 1QFY11 2QFY11 3QFY11 4QFY11 Exhibit 7: Branch expansion picks up in 4QFY2011 2,250 2,000 1,750 1,500 1,250 Branches ATMs (RHS) 5,471 5,121 4,721 4,232 4,393 1,725 1,725 1,765 1,780 1,986 1,000 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 5,750 5,000 4,250 3,500 2,750 2,000 April 19,

5 Asset quality continues to get better The bank has substantially improved its asset quality over the past two years, as reflected in the slippages rate declining from over 5% as of FY2009 to 2.6% for FY2010 and further to 1.1% for FY2011. Provisions expenses to average assets improved to 0.8% for FY2011 from 1.1% in FY2010. Even on a quarterly basis, asset quality continued to improve with gross and net NPAs declining by 4.9% qoq and 10.4% qoq, respectively. NPA provision coverage ratio improved further to 82.5%, even without considering the floating provisions of over `730cr. Restructured advances grew by ~34% qoq (from 0.3% of gross advances as of 3QFY2011 to 0.4% as of 4QFY2011) to ~`640cr, which included the applications received from MFIs for restructuring. The bank has a low ~0.5% exposure to MFIs. During the quarter, the bank continued to make substantial floating and contingent provisions for creating a buffer against future credit risks. The bank made floating and contingent provisions of ~`330cr, accounting for over 77% of the total provisioning burden during 4QFY2011. The bank has an outstanding floating provision pool of ~730cr, building a cushion against future asset-quality pressures. Exhibit 8: Slippages decline materially Exhibit 9: Improving asset quality (%) Gross NPAs (%) Net NPAs (%) PCR (Calc, %, RHS) FY2007 FY2008 FY2009 FY2010 FY2011 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 April 19,

6 Investment arguments Strong capital adequacy, expanding network to sustain traction in credit market share and CASA deposits, respectively In 4QFY2011, the bank s capital adequacy stood at a strong 16.2%, with tier-1 comprising a substantial 74.8%. On the back of this strong CAR, we expect the bank to increase its credit market share over FY Accordingly, we expect the bank to grow its advances by 28% each in FY2012 and FY2013. The bank s strong and profitable growth over the last five years (FY ) was supported by significant traction in CASA market share (from 3.3% in FY2005 to 5.2% in FY2010). The dominant transaction banking business lies at the core of the bank s strength in CASA deposits. Moreover, post the merger of CBoP, the bank s branch network moved up at a 30% CAGR during FY We believe HDFC Bank would be in a position to further increase its CASA market share going ahead by increasing CASA mobilisation at the branches, expanding network at a healthy pace and leveraging its comprehensive product range and strong brand. Comprehensive product portfolio, effective cross-selling to sustain traction in fee income Apart from the traditional CEB and forex income, the bank earns substantial fee income from transaction banking, cards and third-party distribution, among others. Overall, the bank s core fee income increased at a 27.4% CAGR over FY and stood at around 1.7% of ATA in FY2011, one of the best in the sector offering another significant competitive advantage to the bank. Improvement in asset quality The bank has been able to improve its asset quality consistently, as reflected in slippages, which declined from 5.2% in FY2009 to 1.1% during FY2011. Provisions to average assets also declined from 1.2% in FY2009 to 0.8% in FY2011. Outlook and valuation We believe HDFC bank is among the most competitive banks in the sector, with an A-list management at the helm of affairs, which has one of the best track records in the sector. At the CMP, the stock is trading at 3.2x FY2013E P/ABV. We believe the bank is well positioned for high qualitative growth, with the CASA and cost-to-income ratio returning to pre-cbop levels. HDFC Bank has commanded 33.1% premium to the Sensex in terms of its one-year forward P/E multiple over the last five years. We expect the premium to be around its historical average on account of robust growth and RoE prospects over the next two years. We have assigned a multiple of 3.6x FY2013E P/ABV to arrive at a target price of `2,671. We maintain our Accumulate recommendation on the stock. April 19,

7 Exhibit 10: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2012 FY2013 FY2012 FY2013 Credit growth Deposit growth CASA ratio NIMs Other income growth Growth in staff expenses Growth in other expenses Slippages Treasury gain/(loss) (% of investments) Source: Angel Research Exhibit 11: Change in estimates FY2012 FY2013 Particulars (` cr) Earlier Revised Earlier Revised Var. (%) Var. (%) estimates estimates estimates estimates NII 13,302 12,957 (2.6) 16,761 16,177 (3.5) Non-interest income 5,088 5, ,372 7, Operating income 18,390 18, ,133 23, Operating expenses 8,746 8, ,845 11, Pre-prov. profit 9,644 9, ,287 12,232 (0.5) Provisions & cont. 2,040 2, ,312 2,257 (2.4) PBT 7,604 7, ,975 9,975 (0.0) Prov. for taxes 2,433 2, ,192 3, PAT 5,171 5,134 (0.7) 6,783 6,731 (0.8) Source: Angel Research Exhibit 12: Angel EPS forecast vs. consensus Year (`) Angel forecast Bloomberg consensus Var. (%) FY2012E FY2013E Source: Bloomberg, Angel Research April 19,

8 Exhibit 13: P/ABV band Price (`) 2.00x 2.75x 3.50x 4.25x 5.00x 4,000 3,500 3,000 2,500 2,000 1,500 1, Apr-02 Nov-02 Jun-03 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Exhibit 14: P/E band 3,600 Price (`) 15x 20x 25x 30x 3,200 2,800 2,400 2,000 1,600 1, Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Exhibit 15: HDFC Bank Premium/Discount to the Sensex Premium/Discount to Sensex Avg. Historical Premium (10) (30) Mar-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Source: Bloomberg, Angel Research April 19,

9 Exhibit 16: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2013E P/ABV (x) FY2013E Tgt. P/ABV (x) FY2013E P/E (x) FY11E-13E EPS CAGR (%) FY2013E RoA (%) FY2013E RoE (%) AxisBk Buy 1,411 1, FedBk Neutral HDFCBk Accumulate 2,348 2, ICICIBk* Buy 1,090 1, SIB Neutral YesBk Accumulate BOI Accumulate CorpBk Accumulate DenaBk Accumulate (0.8) IndBk Buy IOB Accumulate J&KBk Accumulate OBC Buy PNB Buy 1,183 1, SBI* Buy 2,739 3, UcoBk Neutral UnionBk Buy Source: Angel Research; Note: *Target multiples=sotp target price/abv (including subsidiaries) April 19,

10 Income statement Y/E March (` cr) FY07 FY08 FY09 FY10 FY11 FY12E FY13E Net Interest Income 3,710 5,228 7,421 8,387 10,544 12,957 16,177 - YoY Growth (%) Other Income 1,510 2,205 3,471 3,811 4,284 5,614 7,187 - YoY Growth (%) Operating Income 5,220 7,433 10,892 12,197 14,828 18,571 23,365 - YoY Growth (%) Operating Expenses 2,421 3,746 5,685 5,764 7,102 8,892 11,133 - YoY Growth (%) Pre - Provision Profit 2,799 3,688 5,207 6,433 7,725 9,679 12,232 - YoY Growth (%) Prov. & Cont. 1,160 1,407 1,908 2,144 1,907 2,070 2,257 - YoY Growth (%) (11.1) Profit Before Tax 1,639 2,281 3,299 4,289 5,819 7,609 9,975 - YoY Growth (%) Prov. for Taxation ,054 1,340 1,892 2,474 3,244 - as a % of PBT PAT 1,141 1,590 2,245 2,949 3,926 5,134 6,731 - YoY Growth (%) Balance sheet Y/E March (` cr) FY07 FY08 FY09 FY10 FY11 FY12E FY13E Share Capital Reserve & Surplus 6,114 11,143 14,627 21,065 24,914 28,859 34,049 Deposits 68, , , , , , ,748 - Growth (%) Borrowings 2,815 4,595 2,686 6,563 7,489 9,460 12,108 Tier 2 Capital 3,283 3,449 6,478 6,353 6,905 8,148 9,615 Other Liab. & Prov. 10,407 12,867 16,243 20,616 28,993 36,430 50,466 Total Liabilities 91, , , , , , ,452 Cash Balances 5,182 12,553 13,527 15,483 25,101 20,024 25,631 Bank Balances 3,971 2,225 3,979 14,459 4,568 8,759 11,211 Investments 30,565 49,394 58,818 58,608 70,929 95, ,583 Advances 46,945 63,427 98, , , , ,116 - Growth (%) Fixed Assets 967 1,175 1,707 2,123 2,171 2,660 3,302 Other Assets 3,605 4,403 6,357 5,955 14,601 18,444 23,608 Total Assets 91, , , , , , ,452 - Growth (%) April 19,

11 Ratio analysis Y/E March FY07 FY08 FY09 FY10 FY11 FY12E FY13E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov. /Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis NII (-) Prov. Exp Adj. NII Treasury (0.1) (0.0) Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Leverage RoE April 19,

12 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement HDFC Bank 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) April 19,