Q1FY19 RESULT UPDATE Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 RETAIL EQUITY RESEARCH HDFC Bank Banking BSE CODE: 500180 NSE CODE: HDFCBANK Bloomberg CODE: HDFCB:IN SENSEX: 38,024 BUY Rating as per Large Ccap 12 month investment period CMP Rs. 2119 TARGET Rs. 2388 RETURN 13% 10 th August, 2018 Enviable performance continues HDFC Bank is the second largest private sector bank in India. The Bank has a nationwide distribution network of 4,804 branches and 12,808 ATM's in 2,666 cities/towns. HDFC Bank, yet again, reported strong loan growth of 22% YoY mainly led by 26% YoY growth in retail loans. NII increased at a slower pace of 15% YoY as NIM declined by 20 bps YoY to 4.6%. However, lower opex and provisions helped the bank to report 18% YoY growth in net profit. Asset quality continues to remain strong and stable with Gross nonperforming assets (GNPA) ratio at 1.3% and Net NPA (NNPA) ratio at 0.4%. We expect NII/PAT to grow at a CAGR of 20%/21% over FY18-20E on the back of 20% growth in loans coupled with improving operating efficiency. We remain positive on the bank given its top-notch asset quality, robust retail franchise and strong balance sheet growth. Hence, we maintain BUY rating on the stock with a revised upward TP of Rs2,388 (4.4x FY20E P/ABV). Above industry growth rate continues HDFC Bank continued to report strong loan growth of 22% YoY led by 26% YoY growth in retail and 18% YoY growth in corporate loans. Retail loan book witnessed secular loan growth across personal loans ( 40% YoY), credit cards ( 33% YoY), two-wheelers ( 41% YoY), CV ( 26% YoY) and business banking ( 24%YoY). Home loans jumped 14% YoY and 21% QoQ as the bank bought-out home loans from HDFC Ltd almost after four quarters. Deposits also grew at a strong pace of 20% YoY mainly led by 25% YoY growth in term deposits. This was attributed to more attractive term deposit rates as well as investors switching from debt funds to bank deposits. Going forward, we expect the bank s advances and deposits to grow at a CAGR of 20% and 17%, respectively over FY18-20E as the bank is well-poised to capture a higher share of the incremental credit demand. Strong core operating performance intact HDFC Bank s net interest income (NII) increased at a moderate pace of 15% YoY (marginally below our expectation) as the net interest margin (NIM) declined by 20 bps YoY to 4.6%. The decline in NIM was due to faster rise in term deposits (~25% YoY), relatively higher interest reversals on Agri NPAs (seasonal) and buy out of low yield housing portfolio from HDFC Ltd. However, the bank has raised its MCLR rates during current quarter which should ease yield pressure in coming quarters. Hence, we expect NIM to remain around 4.6%/4.7% in FY19E/FY20E. Other income increased at a slower pace of 8.6% YoY as the bank did not avail RBI dispensation and made entire MTM depreciation of Rs390cr during Q1FY19. Lower opex ( 11% YoY) helped the bank to report 18% YoY growth in net profit. Going forward, we expect NII and net profit to grow at a strong CAGR of 20% and 21%, respectively over FY18-20E on the back of healthy credit growth coupled with improving operating efficiency. Stable asset quality HDFC bank continues to maintain strong and stable asset quality as Gross and Net nonperforming asset (NPA) ratios remain broadly stable at 1.3% ( 3 bps QoQ) and 0.4% ( 1 bps QoQ), respectively. Slippages have marginally increased to 2.1% as against 1.7% in Q4FY18 attributable to higher stress in agriculture sector. However, management remains confident of stable trends in asset quality. The provision coverage ratio (PCR) also remained steady at 69%. Notably, Gross NPA ratio has remained around 1% during the last eight years whereas restructured loans remain miniscule which provides further comfort. Hence, we don t expect any major negative surprises on the asset quality front over near to medium term. Outlook & Valuation HDFC Bank delivered another quarter with stable performance, with its numbers largely in line with our expectations. We are structurally positive on the bank given its top-notch asset quality, robust retail franchise, strong balance sheet growth and best-in-class management pedigree. Further, we expect the bank to maintain superior return ratios with RoE of ~19% and RoA of ~2% over FY18-20E. As a result, HDFC bank will continue to enjoy premium valuation within the banking space. Hence, we maintain BUY rating on the stock with a revised upward target price (TP) of Rs2,388 (4.4x FY20E P/ABV). Company Data Market Cap (cr) Rs. 551,730 Outstanding Shares (cr) 260.4 Free Float 74% Dividend Yield 0.6 52 week high Rs. 2,219 52 week low Rs. 1,685 6m average volume (cr) 0.2 Beta 1.2 Face value Rs. 2 Shareholding (%) Q3FY18 Q4FY18 Q1FY19 Promoters 25.7 25.6 25.5 FII s 40.6 40.4 40.9 MFs/Insti 14.8 15.0 14.6 Public 19.0 19.0 19.1 Others - - - Total 100.0 100.0 100.0 Price Performance 3month 6month 1 Year Absolute Return 7.1% 14.4% 20.0% Absolute Sensex 7.7% 11.8% 19.6% Relative Return* -0.6% 2.5% 0.5% *over or under performance to benchmark index 2500 2000 1500 1000 HDFC Bank Sensex (rebased) Standalone (Rs.cr) FY18 FY19E FY20E Net Interest Income 40,095 47,583 57,133 Growth (%) 21% 19% 20% NIM (%) 4.8 4.6 4.7 Pre Pro Profit 32,625 39,267 47,760 Growth (%) 27% 20% 22% Net Profit 17,487 20,957 25,413 Growth (%) 20% 20% 21% EPS 67.4 80.5 97.6 Growth (%) 19% 19% 21% P/E 31.4 26.3 21.7 P/BV 5.2 4.5 3.8 P/ABV 5.3 4.6 3.9 RoE (%) 17.9 18.2 18.9 RoA (%) 1.8 1.9 1.9
Quarterly Financials (Standalone) Profit & Loss Account (Rs cr) Q1FY19 Q1FY18 YoY Growth % Q4FY18 QoQ Growth % Interest Income 22,549 18,669 20.8 21,321 5.8 Interest on advances 17,391 14,486 20.1 16,663 4.4 Income on Investments 4,589 3,893 17.9 4,223 8.7 Others 569 290 96.4 435 30.8 Interest Expense 11,735 9,298 26.2 10,663 10.1 Net Interest Income 10,814 9,371 15.4 10,658 1.5 Non-Interest Income 3,818 3,517 8.6 4,229 (9.7) Total Net Income 14,632 12,887 13.5 14,886 (1.7) Operating Expenses 5,984 5,367 11.5 6,051 (1.1) Employee Cost 1,811 1,658 9.2 1,741 4.0 Other Operating Exp. 4,173 3,710 12.5 4,309 (3.2) Total Income 26,367 22,185 18.8 25,550 3.2 Total Expenditure 17,719 14,665 20.8 16,714 6.0 Pre-Provisioning profit 8,648 7,520 15.0 8,836 (2.1) Provisions 1,629 1,559 4.5 1,541 5.7 Profit Before Tax 7,018 5,961 17.7 7,295 (3.8) Tax 2,417 2,067 16.9 2,495 (3.1) Net Profit 4,601 3,894 18.2 4,799 (4.1) EPS - Diluted (Rs) 17.7 15.1 16.8 18.5 (4.5) Business Performance (Rs cr) Q1FY19 Q1FY18 YoY Growth % Q4FY18 QoQ Growth % Advances 708,649 580,976 22.0 658,333 7.6 Deposits 805,785 671,376 20.0 788,771 2.2 Business 1,514,434 1,252,352 20.9 1,447,104 4.7 Gross NPA 9,539 7,243 31.7 8,607 10.8 Net NPA 2,907 2,528 15.0 2,601 11.8 Key Ratios (%) Q1FY19 Q1FY18 YoY bps Q4FY18 QoQ bps Net Interest Margin 4.6 4.8 (20) 4.8 (24) Cost of Funds 5.1 5.0 6 5.0 13 Yield on Advances 10.2 10.2 (3) 10.3 (16) Yield on Investments 7.1 7.2 (14) 7.1 (2) Yield on Funds 9.6 9.5 3 9.7 (10) Cost to Income 40.9 41.6 (75) 40.6 25 Credit to Deposit 87.9 86.5 141 83.5 448 CASA 41.7 44.0 (227) 43.5 (180) Capital Adequacy 14.6 15.5 (90) 14.8 (20) Tier I Capital 13.1 13.6 (50) 13.2 (10) Gross NPA 1.3 1.2 9 1.3 3 Net NPA 0.4 0.4 (3) 0.4 1 Provision Coverage 69.2 64.5 466 69.2 (6) Credit Cost 0.9 1.1 (15) 0.9 (2) RoE (Ann.) 17.2 17.0 25 18.5 (131) RoA (Ann.) 1.7 1.8 (5) 1.9 (19) Change in estimates Old estimates New estimates Change % Year / Rs cr FY19E FY20E FY19E FY20E FY19E FY20E Net Interest Income 48,036 57,786 47,583 57,133-0.9-1.1 Pre-Provisioning Profit 39,131 47,299 39,267 47,760 0.3 1.0 Net Profit 20,997 25,420 20,957 25,413-0.2 0.0 EPS (Rs) 80.9 98.0 80.5 97.6-0.5-0.4 Source: Company, Geojit Research
Standalone Financials Profit & Loss Account Y.E March (Rs cr) FY16A FY17A FY18A FY19E FY20E Interest Income 60,221 69,306 80,241 94,936 112,775 Interest Expense 32,630 36,167 40,146 47,353 55,642 Net Interest Income 27,592 33,139 40,095 47,583 57,133 % Change 23.2 20.1 21.0 18.7 20.1 Non-Interest Income 10,752 12,296 15,220 17,631 20,213 Net Income 38,343 45,436 55,315 65,214 77,346 Operating Expenses 16,980 19,703 22,690 25,947 29,586 Total Income 70,973 81,602 95,462 112,567 132,988 Total Expenditure 49,610 55,870 62,837 73,300 85,228 Pre-Provisioning Profit 21,364 25,732 32,625 39,267 47,760 % Change 22.7 20.4 26.8 20.4 21.6 Provisions 2,726 3,593 5,927 7,271 8,962 Profit Before Tax 18,638 22,139 26,697 31,996 38,798 Tax 6,342 7,589 9,211 11,038 13,385 Tax Rate (%) 34 34 35 35 35 Net Profit 12,296 14,550 17,487 20,957 25,413 % Change 20.4 18.3 20.2 19.8 21.3 No. of Shares (cr) 253 256 260 260 260 EPS (Rs) 48.6 56.8 67.4 80.5 97.6 % Change 19.3 16.7 18.7 19.4 21.3 Balance Sheet Y.E March (Rs cr) FY16A FY17A FY18A FY19E FY20E Liabilities Capital 506 513 519 521 521 Reserves & Surplus 72,172 88,950 105,776 123,200 144,950 Deposits 546,424 643,640 788,771 923,406 1082,097 Borrowings 53,018 74,029 123,105 121,011 132,012 Other Liabilities & Provisions 36,725 56,709 45,764 46,754 56,105 Total Liabilities 708,846 863,840 1063,934 1214,893 1415,686 Assets Cash & Balances 38,919 48,952 122,915 125,427 146,983 Investments 163,886 214,463 242,200 257,169 270,524 Advances 464,594 554,568 658,333 785,786 942,944 Fixed Assets 3,343 3,627 3,607 3,588 3,568 Other Assets 38,104 42,230 36,879 42,923 51,667 Total Assets 708,846 863,840 1063,934 1214,893 1415,686 Ratios Y.E March (Rs) FY16A FY17A FY18A FY19E FY20E EPS 48.6 56.8 67.4 80.5 97.6 DPS 9.5 0.0 0.0 13.6 14.1 BV 287.5 349.1 409.6 475.1 558.6 ABV 282.2 341.9 399.6 462.0 542.8 Valuation (%) P/E 43.6 37.3 31.4 26.3 21.7 P/BV 7.4 6.1 5.2 4.5 3.8 P/ABV 7.5 6.2 5.3 4.6 3.9 Div. Yield 0.4 0.0 0.0 0.6 0.7 Spreads (%) Yield on Advances 10.8 10.2 10.3 10.4 10.6 Yield on Investments 8.5 8.4 7.1 7.4 7.2 Yield on Funds 10.4 9.9 9.6 9.8 10.0 Cost of Funds 6.0 5.5 4.9 4.8 4.9 Capital (%) CAR 15.5 14.6 14.8 14.9 14.9 Tier I 13.2 12.8 13.3 13.5 13.7 Tier II 2.3 1.8 1.6 1.4 1.2 Asset (%) GNPA 0.9 1.1 1.3 1.4 1.5 NNPA 0.3 0.3 0.4 0.4 0.4 PCR 69.9 68.7 69.8 70.0 69.9 Management (%) Credit/ Deposit 85.0 86.2 83.5 85.1 87.1 Cost/ Income 44.3 43.4 41.0 39.8 38.3 CASA 43.2 48.0 43.5 42.1 40.7 Earnings (%) NIM 4.8 4.7 4.8 4.6 4.7 ROE 18.3 17.9 17.9 18.2 18.9 ROA 1.8 1.8 1.8 1.9 1.9
Recommendation Summary (last 3 years) Dates Rating Target 3000 03 July 2015 BUY 1,294 19 January 2016 BUY 1,259 2500 29 August 2016 BUY 1,387 30 January 2017 BUY 1,417 2000 04 May 2017 BUY 1,681 06 November 2017 BUY 2,050 1500 08 February 2018 BUY 2,060 26 April 2018 BUY 2,163 1000 10 August 2018 BUY 2,388 500 0 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0%-10%. Reduce - Downside is more than 10%. Neutral - Not Applicable *Initiating Coverage Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Absolute is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit s research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Kaushal Patel, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.
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