HDFC Bank. CMP: INR1,872 TP: INR2,400(+28%) Buy The juggernaut

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1 1 March 2018 Update Sector: Financials HDFC Bank BSE SENSEX S&P CNX 34,047 10,458 CMP: INR1,872 TP: INR2,400(+28%) Buy The juggernaut Stock Info Bloomberg HDFCB IN Equity Shares (m) 2, Week Range (INR) 2014 / , 6, 12 Rel. Per (%) 0/-1/18 M.Cap. (INR b) 5,023 M.Cap. (USD b) 77.9 Avg Val, INRm Free float (%) 79.0 Financials Snapshot (INR b) Y/E Mar 2018E 2019E 2020E NII OP NP NIM (%) EPS (INR) EPS Gr. (%) BV/Sh. (INR) ABV/Sh. (INR) RoE (%) RoA (%) Payout (%) Valuations P/E(X) P/BV (X) P/ABV (X) Div. Yield (%) Shareholding pattern (%) As On Dec-17 Sep-17 Dec-16 Promoter DII FII Others FII Includes depository receipts Stock Performance (1-year) HDFC Bank Sensex - Rebased 2,200 2,000 1,800 1,600 1,400 1,200 Feb-17 May-17 Aug-17 Nov-17 Feb-18 HDFC Bank (HDFCBK) has consistently grown its market share in loans and deposits across credit cycles, and has emerged as the best-managed bank in India with robust profitability/growth metrics. Increasing granularity of the balance sheet, a focus on fee income growth, an improvement in operating leverage aided by digital initiatives, and controlled credit costs backed by strong underwriting have enabled the bank to outperform most peers. We expect the bank to maintain its growth momentum (regardless of its systemic size) and further gain market share across business segments. This, coupled with steady revenue growth, a continued improvement in operating leverage and moderation in credit cost, will help accelerate earnings growth (24% CAGR over FY18-20E). Moreover, its subsidiaries HDB Financial Services and HDFC Securities are rapidly gaining scale and will further support valuations. We expect HDFCBK to deliver RoA/RoE of 1.96%/17.4% in FY20E (RoE is suppressed as we have built in capital raise of INR240b). We maintain our Buy rating with a target price of INR2,400. Market share gains to continue; No size too big Over the past 10 years, HDFCBK has steadily grown its loans/deposits market share to ~7.8%/ 6.4% of the system, driven by steady branch addition (up 7x from 684 in FY07 to 4,715 in FY17), improving employee productivity (business/employee doubled over FY07-17), and effective use of technology to gain distribution efficiency (cost-to-core income ratio decreased 840bp to 44.5% over FY07-17). The bank has also recorded the highest incremental market share among peers. We expect HDFCBK to continue gaining market share to reach 10% by FY22, driven by robust growth in the vehicle portfolio, business banking and unsecured segments. Retail loan growth remains strong; working diligently to expand the pie HDFCBK has grown its retail book at a 27% CAGR over the past three years, significantly ahead of systemic retail loan growth. Enhanced focus on rural and semi-urban locations has helped the bank to gain strong traction in retail and SME loans. SME loan growth has also received a boost from digitization of the application process, which has reduced the turnaround time (TAT). While the share of unsecured personal and credit card loans has increased, the bank s credit monitoring framework remains robust, helping it maintain strong control on delinquency levels. The bank has 50%+ market share in the credit card business; it targets to double its outstanding card base over the next three years. Robust third-party and bancassurance fees are driving overall fee growth HDFCBK has built a strong and well-diversified fee income profile over the years. While fee income forms ~1.2% of average assets and ~23% of total income, the contribution of third-party distribution to total fees has steadily increased to 16% from 11% in FY14. This was driven by a 14% CAGR in third-party fees over FY Research Analyst: Nitin Aggarwal (Nitin.Aggarwal@MotilalOswal.com); Anirvan Sarkar (Anirvan.Sarkar@MotilalOswal.com); Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Piran Engineer (Piran.Engineer@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Bancassurance income from HDFC Standard Life Insurance forms ~32% of HDFCBK s third-party distribution fees. HDFCBK continues to command >70% of total commissions paid by HDFC Life, which, coupled with strong new business growth trend for HDFC Life (43% growth over FY18YTD), provides visibility of robust fee income from this channel. Operating leverage continues to surprise positively; digital initiatives help reduce sourcing costs The bank has channelled its digital abilities to reduce involvement of manpower in routine, process-driven operations, with an aim to enable employees to focus more on business generation. Initiatives such as 10-second personal loans and preapproved auto loans have helped reduce sourcing costs, leading to a steady improvement in cost-ratios. Over the past four years, the C/I ratio has improved by 450bp to 41%, and the cost-asset ratio by 31bp to 2.4%. We expect continued operating leverage improvement (38.4% cost-income by FY20E), led by (i) controlled employee/network growth, (ii) further improvement in branch productivity and (iii) lower operating expenses due to increasing usage of technology. Subsidiaries rapidly gaining scale; expected to add ~4.3% to valuations Both HDB Financials and HDFC Securities have grown robustly over the last three years. While HDB Financials reached AUM of INR352b by 1QFY18 (comparable to CIFC), HDFC Securities recorded ~40% PAT CAGR over FY14-17, with its RoE improving to a healthy level of 29%+ from 22% in FY16. We expect both the subsidiaries to maintain strong growth trajectory over the next few years. At 25x FY20E earnings for HDFC Securities and 3.5x FY20E BV for HDB Financials, the two subsidiaries together would add INR103 to our TP, post hold-co discount of 20%. Improvement in RoRWA underscores adequate pricing of risk; asset quality risks well in control Owing to stronger growth in the unsecured portfolio, the bank s RWA has steadily increased to 79% of total assets, indicating an increase in the risk profile. However, we note that besides the improvement in RoA (40bp improvement over FY11-18), the RoRWA of the bank has improved by ~30bp to ~2.5% during the same period. This indicates that (i) profitability has improved on the back of multiple levers (higher fee income and lower opex) rather than simply taking on higher balance sheet risk and (ii) the bank is able to adequately price the incremental risk it is taking via robust growth in the unsecured portfolio. The delinquency trend in the unsecured portfolio also remains well in control, given that >60% of credit card loans and >50% of personal loans are disbursed to existing customers with a strong credit history. HDFCBK s focus in extending these products largely to salaried customers also helps it in maintaining healthy asset quality. Valuation view We expect HDFCBK to record 23% loan book CAGR and 24% PAT CAGR over FY18-20E, with RoA/RoE of 1.96%/17.4% in FY20E (RoE is suppressed as we have built in capital raise of INR240b in our numbers). While margins may contract slightly due to intensifying competition, its robust fee income profile and strong control on operating leverage will continue driving a steady improvement in the return ratios (12bp improvement in RoA over FY18-20E). We arrive at a target price of INR2,400 (3.9x Mar 20E ABV and INR103 for subs) and maintain our Buy rating. 1 March

3 Exhibit 1: Loan market share has increased to 7.8% for the bank Credit market share Market share gains to continue No size too big! HDFCBK has consistently grown its market share in loans and deposits across credit cycles. The bank, thus, accounts for 7.8%/6.4% market share in loans/deposits v/s 2.4%/2.6% ten years ago. It ranks at the top amongst private players. Market share expansion has accelerated over the past few years, led by continued traction across several product segments at a time when asset quality pressures have been impacting growth for many of its large private peers. The bank s loan book is now 25% higher than the closest private peer ICICI Bank, while the differential in the growth outlook will enable it to further widen its lead over the next few years Exhibit 2: while deposits market share has increased to 6.4% 6.4 Deposit market share FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 3QFY18 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 3QFY18 Exhibit 3: Among major new private banks, HDFCBK has increased its advances market share to ~30% HDFC Bank ICICI Bank Kotak Mahindra Bank Axis Bank Indusind Bank YES Bank FY05 FY10 FY15 FY17 9MFY18 Exhibit 5: Strongest credit market share gain among peers HDFC Bank credit market share ICICI Bank credit market share Axis Bank credit market share Exhibit 4: while deposits market share has increased to 6.4% HDFC Bank ICICI Bank Kotak Mahindra Bank Exhibit 6: as well as deposit market share 2.1 Axis Bank Indusind Bank YES Bank FY05 FY10 FY15 FY17 9MFY HDFC Bank deposit market share ICICI Bank deposit market share Axis Bank deposit market share FY05 FY10 FY15 FY17 3QFY18 Source: MOSL, RBI, Company FY05 FY10 FY15 FY17 3QFY18 Source: MOSL, RBI, Company 1 March

4 While a few investors may have second thoughts on the long-term sustainability of this growth momentum given the increasingly bigger size of the bank, we believe that HDFCBK is well positioned to outgrow the system and further gain market share regardless of its size. We thus expect HDFCBK to attain 10% market share by FY22 while systemic loan growth also revives modestly. Instead of just eating up into the market share from other banks, mainly PSU banks, HDFCBK has been able to expand the credit pie, with expansion of its network in sub-urban/rural geographies. This has helped the bank in maintaining uniform growth across its retail and wholesale segments in retail it is developing and capitalizing on new lending opportunities (given that PSU banks have limited presence in this segment to gain from), while in wholesale it is gaining market share both by way of refinancing and finding out fresh lending opportunities. Well positioned to further strengthen its leadership across business segments Auto loans to maintain healthy growth; used passenger vehicle mix gaining share: HDFCBK has grown its auto loan portfolio at a healthy 21% CAGR over the past three years, led by healthy traction in car/cv and auto loans. This was well supported by the increase in the share of used passenger vehicles, which now forms ~15% of the total passenger vehicle portfolio. The shift from the unorganized to organized segment in the used PV market and the bank s targeted efforts into NBFC-dominated deeper geographies led by its stronger branch network are further enabling it to gain market share. HDFCBK also aims to maintain strong growth trajectory in the CV portfolio. However, it does not plan to target the small CV segment very aggressively yet, as demand for MHCVs under the GST regime is likely to outpace that in lower tonnage vehicles. The bank, thus, is closely watching the developments in this segment, where some initial signs of strength are visible. Exhibit 7: The bank has recorded robust growth in vehicles book from FY FY11 FY12 Car Loans (% growth) CV loans (% growth) 2 wheeler loans (% growth) FY13 FY14 FY15 FY16 FY17 9MFY18 Exhibit 8: Vehicle finance has declined as % of total book over the last few years 2 wheeler loans (% total loans) CV loans (% total loans) Car Loans (% total loans) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 9MFY18 1 March

5 Unsecured portfolio to maintain growth momentum; asset quality trends remain strong: HDFCBK has delivered 39%/30% CAGR in the personal loans/credit card segments over the past three years. The share of unsecured loans in the total retail portfolio has thus increased 520bp over the past three years to reach ~30% (~16% of total loans). Exhibit 9: Personal and credit card loans have recorded robust growth in last few years Personal loans (% growth) Credit Cards (% growth) FY11 FY12 FY13 FY14 FY15 FY16 FY17 9MFY18 Credit cards HDFCBK currently accounts for 29% of the total credit card market by both 9MFY18 POS transaction volume and transaction amount. This enables the bank to tie-up with multiple retail partners/brands and e-commerce companies, and offer attractive promotional schemes on purchases via its credit cards (e.g. cash backs on Apple i-phone purchase and discounts on purchase from Vijay Sales). This helps the bank in stepping up the customer acquisition run-rate and gain further market share. 1 March

6 Exhibit 10: Multiple tie-ups with retailers (both ecommerce sites and physical stores) drive credit card portfolio growth 1 March

7 Exhibit 11: Tie-ups with retailers and e-commerce sites help improve HDFCBK s credit card proposition and boost customer acquisition run-rate Credit card customers currently comprise ~25% of the bank s 42m customer base. Management aims to increase this penetration to ~50% of its current customer base over the next three years, even as it is witnessing steady growth in customer accounts every year. Thus, even as HDFCBK accounts for 29%/50%+ of the total credit card industry by number of cards/credit outstanding, it is still very well placed to double its card base over the next three years. 1 March

8 Exhibit 12: HDFCBK has 29% of outstanding credit cards in the system 9MFY18 Cards outstanding (m) No of POS transactions (m) Amount of POS transactions (INRb) Average ticket size (INR'000) AXIS BANK ,324.0 HDFC BANK ,239.1 ICICI BANK ,673.6 INDUSIND BANK ,728.7 KOTAK MAHINDRA BANK ,001.5 YES BANK ,730.5 Grand Total , , ,248.0 Source: MOSL, RBI, Company Exhibit 13: and accounts for 50%+ of systemic credit card outstanding, thus pointing toward higher transactional market share Share of credit cards (%) Credit card loans outstanding (INR b) Share of system level credit card loans (%) Axis Bank HDFC Bank ICICI Bank IndusInd Bank Source: Company, RBI, MOSL The bank intends to continue maintaining robust growth in both credit cards and personal loans segments, and is not overly worried about the increase in the unsecured proportion of its loan book. HDFCB highlighted that the delinquency trend in the unsecured portfolio remains well in control, given that >60% of credit card loans and >50% of personal loans are disbursed to existing customers with a strong credit history. HDFCBK s focus on extending these unsecured products largely to salaried customers also helps it in maintaining healthy asset quality. HDFCBK has recently increased bulk TD rates to match retail TD rates with an aim attract more deposits Time-tested growth strategy will help maintain stable margins HDFCBK has judiciously shaped its asset growth strategy in sync with the built up of its liability portfolio. Post demonetization, the bank reported a few quarters of higher-than-usual corporate book growth, as it utilized the excess liquidity and the low cost of funds environment in building a lower-yield corporate book. Exhibit 14: Corporate loan growth picked up post demonetization Retail loans (% growth) Corporate loans (% growth) QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Source: Company, MOSL 1 March

9 However, with tightening of the rate environment and continued weakness in deposit growth, the bank is focusing more on high-yield retail book. HDFCBK has recognized that growth from here may not be met by deposit accretion alone and that it might need to raise borrowings to bolster its funding base. The bank has also recently increased bulk deposit rates in order to boost deposit growth, even as total retail deposits still form ~95% of its total SA+term deposit mix. The bank believes that the interest rate cycle has bottomed out, and has recently increased MCLR in order to offset the pressure on funding cost. We estimate HDFCBK to maintain stable margins over FY18-20E. Exhibit 15: Every major private bank (except ICICI Bank) has increased MCLR in February 2018 Bank Tenure Apr'17 Sep'17 Jan'18 Feb'18 One month 7.85% 7.85% 7.80% 7.80% HDFC Bank Three months 7.90% 7.90% 7.85% 7.85% Six months 7.95% 7.95% 7.90% 8.00% One year 8.15% 8.15% 8.10% 8.20% One month 7.85% 7.85% 7.80% 7.80% ICICI Bank Three months 7.90% 7.90% 7.85% 7.85% Six months 8.15% 8.15% 8.15% 8.15% One year 8.20% 8.20% 8.20% 8.20% One month 7.90% 7.80% 7.85% 7.85% Axis Bank Three months 8.05% 8.00% 8.05% 8.15% Six months 8.15% 8.15% 8.20% 8.30% One year 8.25% 8.25% 8.30% 8.40% One month 8.10% 7.70% 7.85% 8.00% Kotak Bank Three months 8.25% 8.10% 8.15% 8.35% Six months 8.50% 8.30% 8.35% 8.45% One year 8.80% 8.60% 8.65% 8.65% One month 8.45% 8.35% 8.35% 8.50% Three months 8.75% 8.65% 8.65% 8.80% IndusInd Bank Six months 9.00% 8.90% 8.90% 9.05% One year 9.10% 8.95% 8.95% 9.10% One month 8.20% 7.95% 8.05% 8.25% Yes Bank Three months 8.45% 8.30% 8.35% 8.65% Six months 8.60% 8.50% 8.65% 8.95% One year 8.80% 8.80% 8.95% 9.15% 1 March

10 Strong fee income trend to continue; Third-party distribution and bancassurance to keep growth buoyant HDFCBK has built a strong and well-diversified fee income profile over the years. While fee income forms ~1.2% of average assets and ~23% of total income, the contribution of third-party distribution to total fee income has steadily increased to 16% from 11% in FY14 as the same reported 31% CAGR over past three years. Exhibit 16: Contribution of third-party distribution fees to total fee income has increased steadily Third party distribution % of fee income Exhibit 17: Bancassurance remains the dominant channel for sourcing new business for HDFC Life Individual NBP through Banca channel (%) FY12 FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Bancassurance income from HDFC Standard Life Insurance forms a significant portion (~32%) of HDFCBK s third-party distribution fees. For HDFC Life, the bancassurance channel has been a key growth driver and it generates the largest proportion of Individual New Business Premium (NBP) (61% for FY17). While HDFC Life has multiple bancassurance partners (HDFC Bank, RBL Bank, IDFC Bank etc.), the sourcing share of HDFCBK remains highest, and this translates into healthy commissions paid by HDFC Life to HDFCBK. We observe that HDFCBK continues to command >70% of total commissions paid by HDFC Life. This, coupled with the strong new business growth trend for HDFC Life (>40% over FY18YTD), provides visibility of robust fee income from this channel for the bank. Exhibit 18: HDFCBK has 70%+ share of total commissions paid by HDFC Life Banca income from HDFC Life HDFC Bank's total share of commissions FY13 FY14 FY15 FY16 FY17 1 March

11 Operating leverage continues to surprise positively; digitization has helped reduce sourcing cost HDFCBK has reported a steady improvement in operating costs, which enabled it to maintain healthy earnings growth. Over the past four years, the C/I and costasset ratios have thus improved by 450bp and 31bp to current levels of 41% and 2.4%, respectively. We expect a continued improvement in operating leverage as (i) employee/network growth remains controlled, (ii) branch productivity improves further, and most importantly, (iii) usage of technology further drives down expenses. HDFCBK s opex strategy is centred around (a) increasing operating efficiency (evident from an increase in business/employee from INR88m in FY14 to INR129m in FY17), (b) maintaining controlled branch expansion (added 179 branches over past one year) while the employee count has remained flat, (c) efficient use of digital technology, thereby raising customer convenience and ease and (d) competing against disruptive technology. Process automation has helped reduce sourcing costs: HDFCBK pioneered the concept of online personal loans and has been witnessing strong traction in 10- second personal loans, as against the usual turnaround time of three days. Digital channels, thus, account for ~30% of incremental personal loans, ~10% disbursement share via preapproved online auto loans and ~10% of Amazon s volumes through SmartBuy. Exhibit 19: Share of digital channels in sourcing loans has increased significantly Most of the disbursements through this channel are to HDFCBK s existing customer base, whose account transaction history is recorded in the bank s database and thus can be quickly accessed for credit appraisal. Thus, in effect, there is no dilution in underwriting stands while achieving higher efficiency through the digital channel. The bank has used similar automation in other products such as auto and SME loans, and has achieved similar reduction in sourcing costs. 1 March

12 Replacement of human labor for routine processes: Online sourcing and increasing use of technology have enabled the bank to reduce the expenses on logistics and manpower (office boys who travel to customer locations, as well as personnel in operations and sanctioning functions). The bank is aiming to use artificial intelligence/robotics for routine work at its branches, which will further help control opex and support return ratios. Exhibit 20: Cost-income and cost-to-assets ratio will continue to trend lower Exhibit 21: Branch and employee addition have slowed down while productivity gains are likely to continue Cost-Income (%) Cost-Assets (%) ,417 Change in headcount Branches added in the last 3 years 1,470 1,458 2,989 8,935 9,555 1,312 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 3QFY18 FY18E FY19E FY20E FY14 FY15 FY16 FY17-3,230 Exhibit 22: Key digital offerings of the bank Chillr Smartbuy PayZapp Mobile Banking App An app that lets customers send money immediately to anyone in their phone book, 24x7 Can also send money without sharing mobile numbers with Chillr App users in the vicinity, using 'Near Me' option Recharge your mobile, DTH and data cards Immediate transfer money between bank accounts SmartBuy is a marketplace / A complete payment platform, that has tied up solution, giving customers the with various merchants, for power to pay in just One display of offers extended by Click. merchants to HDFC Bank's debit / credit card customers HDFC Bank facilitates the payment by its customers by providing the Payment Gateway Services and does not earn any fee by hosting this website HDFC Bank MobileBanking App helps check account balance, transfer funds, pay bills, etc. One can shop on mobile at One can access partner apps, buy movie 75+transactions tickets, music and groceries, anytime/anywhere using the compare and book flight app. tickets and hotels, shop online, send money to anyone in the contact list, pay bills and recharge mobile, DTH and data card. 1 March

13 Exhibit 23: Branches with less than 3 years vintage have decreased in absolute numbers Exhibit 24: and as % of outstanding branches 1,041 1,225 1,132 1,337 1,417 1,470 1,458 1,312 1, FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 3QFY18 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 3QFY18 Exhibit 25: Business per branch has improved consistently - INRb HDFC Bank Axis Bank ICICI Bank Kotak Bank IndusInd Bank Exhibit 26: as has business per employee, INRm HDFC Bank Axis Bank ICICI Bank IndusInd Bank FY13 FY14 FY15 FY16 FY17 3QFY FY13 FY14 FY15 FY16 FY17 1 March

14 Subsidiaries are rapidly gaining scale; expect growth momentum to continue Both subsidiaries of HDFC Bank HDB Financials (96.2% ownership) and HDFC Securities (97.9% ownership) have shown robust growth over the past few years. HDB Financials has reached AUM of INR338b at the end of FY17 (comparable to CIFC) and has been delivering healthy return ratios. Over the past five years, the company has delivered 68%/53% growth in net earnings/aums. In FY17, the company reported RoA/RoE of 2.3%/15.3%. HDB Financial is well capitalized, with Tier I/CAR of 15.3%/20.8%, as against regulatory requirement of 15% CAR. We expect this subsidiary to gain further scale over the near term with adequate capital support from HDFCBK. HDFC Securities has grown its PAT at 16% CAGR over FY However, revenue/earnings growth has picked up over the past few years, aided by rising share of financial savings and increasing formalization of the economy. HDFC Securities has expanded its presence from 194 branches in 150 cities in FY13, to 273 branches across 190 cities in FY17. The company reported 40% CAGR in its net profit over FY14-17, while FY17 RoE expanded to ~29% v/s 22% in FY16. With an improvement in operating leverage, steady growth in new customer additions and buoyant markets, we expect the company to report a strong earnings trend over the next few years. We, thus, expect both the subsidiaries to maintain strong growth trajectory and do not envisage the bank to monetize these stakes over the near term. At 15x FY20E earnings for HDFC Securities and 3x FY20E BV for HDB Financials, together these subsidiaries add INR103 to our TP, post hold-co discount of 20%. Exhibit 27: HDB Financials has recorded 42% AUM CAGR over FY13-17 AUM (INRb) Exhibit 28: while PAT has grown at 61% CAGR over the same period PAT (INRb) 42% CAGR 61% CAGR FY13 FY14 FY15 FY16 FY17 3QFY FY13 FY14 FY15 FY16 FY17 1 March

15 Exhibit 29: RoA/RoE continues to be healthy for HDB while Exhibit 30: asset quality has remained pristine RoA RoE Net NPA (bps) FY13 FY14 FY15 FY16 FY17 Exhibit 31: HDFC Sec has recorded 34% CAGR over FY13-17 FY14 FY15 FY16 FY17 Exhibit 32: RoE has expanded sharply in FY17 PAT RoE % CAGR FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Exhibit 33: HDFC Securities features among the top 5 in terms of brokerage revenues. Brokerage revenue (INR m) FY14 FY15 FY16 FY17 ICICI Securities 4,960 7,554 6,607 7,759 Kotak Securities 3,439 5,917 5,719 7,424 Motilal Oswal 2,648 4,449 4,510 5,516 India Infoline 3,233 4,726 4,254 4,412 HDFC Securities 2,039 3,374 3,116 4,211 Others 66,424 1,01,608 92,862 1,10,478 Total 82,743 1,27,628 1,17,068 1,39,800 Exhibit 34: while being the 2 nd in terms of active clients on NSE Active clients on NSE, ( 000) FY14 FY15 FY16 FY17 2QFY18 ICICI Securities Limited HDFC Securities Ltd Sharekhan Ltd Axis Securities Ltd Kotak Securities Ltd Others 2,933 3,418 3,434 3,950 4,616 Exhibit 35: Comparison of PAT across brokerages PAT (INRb) FY14 FY15 FY16 FY17 HDFC Sec ICICI Sec Axis Sec Source: Company, MOSL 1 March

16 Improvement in RoRWA underscores adequate pricing of risk; asset quality risks well in control Over the last three years, HDFCBK s retail loan mix has evolved in favor of unsecured products, with robust growth in the credit cards portfolio and unsecured personal loans, which have increased from ~18% of the retail book in FY14 to ~23% currently. However, growth in the unsecured credit card and personal loans segment does not have a linear correlation with the bank s risk profile, in our view. This is because a significant part (60-65%) of credit cards is sold to existing customers post appraisal of their credit history. Also, the bank has witnessed a low revolving rate from credit card customers, which implies a smaller customer base paying interest on card purchases, and thus, bringing the risk of turning delinquent. The bank s focus is on earning fee rather than interest income from its cards business. The bank manages risk in its personal loans segment in a similar way as 50-55% of PL loans are disbursed to existing customers. Over FY10-17, the bank s RWA increased from 69.7% to 74.1% of total assets, indicating an increase in the risk profile. However, we note that, over the long term, besides the improvement in RoA (+40bp over FY11-18), the RoRWA of the bank has also improved by ~30bp to ~2.5% during the same period. This indicates that (i) profitability has improved on the back of multiple levers (higher fee income and lower opex) rather than simply on higher balance sheet risk and (ii) the bank is able to adequately price the incremental risk it is taking in the unsecured portfolio, and earn higher return on the same. Exhibit 36: RoRWA has increased at the same pace as RoA Exhibit 37: Share of low-cost digital channels is going up RoRWA RoA RWA/Assets Internet and mobile Phone banking Branches ATM FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 2QFY18 3QFY18 FY01 FY06 FY09 FY14 FY15 FY16 FY17 We expect HDFCBK s RoA to improve by ~12bp over FY18-20, aided by steady revenue growth and moderation in credit costs. We note that, in 9MFY18 YTD, the operating profit of the bank has grown at faster 29% YoY; however, elevated provisioning expenses (more on account of supervisory review and agri loan waivers than towards unsecured portfolio) have resulted in stable 20% YoY growth in net profit. We expect credit cost to moderate by ~10bp over FY18-20, while stable revenue growth, continued buoyancy in fee income and controlled opex should drive healthy growth in net profit. We, thus, expect HDFCBK to deliver 24% earnings CAGR over FY18-20E, as against its FY14-18E average profit growth of ~20%. 1 March

17 Exhibit 38: PPoP to RWA has held strong even in periods of RoRWA decline PPoP to average assets PPoP to average RWA RWA/Assets FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 2QFY18 3QFY18 Exhibit 39: DuPont Analysis for HDFCBK operating leverage continues to boost profitability Y/E March FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Interest Income Interest Expended Net Interest Income Core Fee Income Trading and others Non Interest income Total Income Operating Expenses Employee cost Others Operating Profits Core operating Profits Provisions NPA Others PBT Tax RoA Leverage (x) RoE March

18 Valuation and view Long-term industry view: Bank credit growth has slowed down over the last three years, with the muted demand environment tapering off greenfield investments in core industries. However, utilization levels are expected to pick up from here, leading to capex cycle revival, while retail demand should remain strong due to rising income/consumption levels and the GoI s initiatives toward housing and agriculture growth. RBI-led time-bound balance sheet clean-up of large-ticket stressed assets and capital infusion by the GoI will help banks to ride this leg of growth, as they should be sufficiently capitalized for growth post providing for stress on their books. HDFCBK against that industry backdrop Strong balance sheet traction expected to accelerate with capital raise: In a slow credit environment and on a high asset base, HDFCBK has increased its credit market share from 5.4% in FY15 to 7.8% in 3QFY18 to become the largest private sector bank in India while maintaining pristine asset quality. With its recent capital raise of INR240b, the bank is expected to accelerate balance sheet growth from here and continue gaining market share in both assets and liabilities. Continued operational efficiency to help maintain profitability: HDFCBK has continuously used digitization to reduce operating expenses and increase crosssell of fee products, helping improve operating leverage and RoA/RoE. Continued digital initiatives are expected to drive further improvement in operating leverage and help improve profitability as the bank focuses on the next phase of growth. We expect HDFCBK to record 23% loan book CAGR and 24% PAT CAGR over FY18-20, with RoA/RoE of 1.96%/17.4% in FY20 (RoE is suppressed as we have built in capital raise of INR240b in our numbers). While margins may see a slight contraction due to intensifying competition, its robust fee income profile and strong control on operating leverage will continue driving a steady improvement in the return ratios (12bp improvement in RoA over FY18-20E). Valuation view: We arrive at a target price of INR2,400 for the bank (3.9x Mar 20E ABV for standalone bank and INR103 for the subs) and maintain Buy. 1 March

19 Financials and Valuations Income Statement (INR Million) Y/E March E 2019E 2020E Interest Income 350, , , , , , ,640 1,158,776 Interest Expense 192, , , , , , , ,949 Net Interest Income 158, , , , , , , ,828 Change (%) Non Interest Income 68,526 79,196 89, , , , , ,201 Total Income 226, , , , , , , ,029 Change (%) Operating Expenses 112, , , , , , , ,797 Pre Provision Profits 114, , , , , , , ,232 Change (%) Core PPP 97, , , , , , , ,631 Change (%) Provisions (excl tax) 16,770 15,880 20,758 27,256 35,933 60,500 65,137 76,596 PBT 97, , , , , , , ,636 Tax 30,249 42,937 51,128 63,417 75,894 92, , ,704 Tax Rate (%) PAT 67,257 84, , , , , , ,931 Change (%) Balance Sheet Y/E March E 2019E 2020E Equity Share Capital 4,759 4,798 5,013 5,056 5,125 5,371 5,371 5,371 Reserves & Surplus 357, , , , ,571 1,267,161 1,439,943 1,662,389 Net Worth 362, , , , ,696 1,272,286 1,445,068 1,667,514 Deposits 2,962,470 3,673,375 4,507,956 5,464,242 6,436,397 7,479,093 8,930,037 10,644,604 Change (%) of which CASA Dep 1,405,215 1,646,214 1,984,921 2,363,108 3,091,525 3,335,675 4,063,167 4,992,319 Change (%) Borrowings 330, , , , , ,769 1,296,400 1,747,754 Other Liabilities & Prov. 348, , , , , , ,955 1,055,285 Total Liabilities 4,003,319 4,915,995 5,905,031 7,407,961 8,638,402 10,425,918 12,529,706 15,115,403 Current Assets 272, , , , , , , ,819 Investments 1,116,136 1,209,511 1,516,418 1,958,363 2,144,633 2,463,715 2,704,326 3,092,901 Change (%) Loans 2,397,206 3,030,003 3,654,950 4,645,940 5,545,682 6,738,004 8,341,649 10,218,519 Change (%) Fixed Assets 27,031 29,399 31,217 33,432 36,267 39,531 43,089 46,967 Other Assets 190, , , , , , , ,196 Total Assets 4,003,319 4,915,995 5,905,031 7,407,961 8,638,402 10,425,918 12,529,706 15,115,403 Asset Quality Y/E March E 2019E 2020E GNPA (INR m) 23,346 29,893 34,384 43,928 58,857 86,626 99, ,316 NNPA (INR m) 4,690 8,200 8,963 13,204 18,440 28,404 31,391 33,788 GNPA Ratio NNPA Ratio Slippage Ratio Credit Cost PCR (Excl Tech. write off) E: MOSL Estimates 1 March

20 Financials and Valuations Ratios Y/E March E 2019E 2020E Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Invt Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Capitalization Ratios (%) CAR Tier I Tier II Asset-Liability Profile (%) Loans/Deposit CASA Ratio Cost/Assets Cost/Total Income Cost/Core Income Int. Expense/Int.Income Fee Income/Total Income Non Int. Inc./Total Income Empl. Cost/Total Expense Investment/Deposit Valuation RoE RoA RoRWA Book Value (INR) Change (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Change (%) Price-Earnings (x) Dividend Per Sh (INR) Dividend Yield (%) E: MOSL Estimates 1 March

21 N O T E S 1 March

22 Explanation of Investment Rating Investment Rating Expected return (over 12-month) BUY >=15% HDFC Bank SELL < - 10% NEUTRAL > - 10 % to 15% UNDER REVIEW Rating may undergo a change NOT RATED We have forward looking estimates for the stock but we refrain from assigning recommendation *In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend. Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). Motilal Oswal Securities Ltd. (MOSL) is a SEBI Registered Research Analyst having registration no. 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