Banking India HDFC Bank Ltd (HDFCB) HDFCB IN; HDBK.BO Institutional Equity Research April 23, 215 result review BUY Steady growth, high NIM and capital adequacy Current price (23 Apr) Rs 1,14 Target price Rs 1,25 Upside/(downside) % 23 Earning estimate Unchanged Market data Mkt capitalisation Rs bn 254.3 Average daily vol ' 1791.9 52-week H/L Rs 119 / 711 Shares O/S mn 256.5 Free float mn 1963.3 Promotor holding % 21.7 Foreign holding % 32.6 Face value Rs 2. Price performance 1m 3m 6m 1yr Nifty (abs) (1.8) (4.9) 4.8 22.8 Stock (abs) (3.3) (2.8) 13.1 38.3 Relative to Index (1.5) 2.1 8.3 15.5 Performance 12 15 9 75 (5) (1) (15) 6 (2) Apr-14 Jul-14 Oct-14 Jan-15 HDFC Bank (LHS) Source: Bloomberg, SSLe 5 Rel. to Bankex (RHS) HDFC Bank s (HDFCB) PAT grew 2.6% in, inline with SSLe, driven by a healthy growth of 21.4% and 28.1% in NII and non-interest income, respectively. Asset quality remained steady during the quarter. We maintain BUY on the Bank for its strong fundamentals and consistent growth in profits, with a TP of Rs1,25. The strong return ratios (close to 2.% RoA) are likely to support valuations. At our target price, the stock would trade at PBV of 4.4x F16e and 3.8x F17e. Steady growth in loan book, high CASA share to support NIM: HDFCB continues to grow faster than the system, with the share of corporate advances increasing by more than 2bps YoY to ~52.7% in. Segments such as housing loans, unsecured lending and auto loans witnessed traction, growing 25% YoY, 29% YoY and 23% YoY, respectively. The Bank maintained its high 45% CASA share, supported by strong network expansion, which increased 1% QoQ. As a result, despite a lower credit-deposit ratio, NIMs remained stable at 4.4% and we expect this to sustain over F15 F17. High proportion of CASA and higher yielding retail portfolio would help the Bank sustain NIM at a robust 4.5% in F16e/ F17e. Improvement in fees, likely to support ROA: Fuelled by healthy fee growth (up 2.6% YoY) and high forex income (up 3% YoY), non-interest income rose 28.1% YoY. We anticipate its business growth to be robust and traction in fee income to continue; we estimate fees-to-earning assets to stand at 1.5% over F15 F16. Asset quality resilient, well-capitalized for growth: The Bank sold off one account to the tune of Rs4.4bn to ARCs in Q4. Gross slippages increased 6bps QoQ to 2% of advances. However, with 1% GNPA, 73% NPA coverage and.1% restructured assets, credit costs are unlikely to dampen the earnings growth. With a capital adequacy of 16.8% and Tier 1 capital of 13.7%, the Bank is sufficiently capitalized to take advantage of the improved economic cycle. Key Risk: Prolonged delay in economic recovery would restrict loan growth and adversely impact profits. Financial summary Y/E March (Rs mn) F13 F14 F15e F16e F17e Net interest income 158,111 184,826 223,957 276,117 338,699 NIM 4.57 4.39 4.34 4.45 4.52 Operating profit 114,276 1,61 174,45 21,368 257,346 PAT 67,263 84,784 12,159 126,363 157,762 EPS 28.3 35.3 4.8 5.3 62.6 ABV 15.2 177.8 2.8 287.6 337.6 P/ABV (x) 6.7 5.6 4.1 3.5 3. P/E (x) 35.4 28.3 24.5 19.9 16. Dividend yield.6.7.1.9 1. RoE 2.3 21.3 19.4 18.7 19.8 RoAA 1.8 1.9 1.9 1.9 2. SBICAP Research on Bloomberg SBICAP <GO>, www.securities.com Please refer to our disclaimer given at the last page.
Healthy growth and high NIM of 4.4% drive the 21% YoY growth in NII Cost rises sharply QoQ on account of 1% increase in branches QoQ Quarterly financials Y/E March (Rs mn) YoY QoQ e Var. Interest earned 13,64 17,886 2.6 123,958 4.9 135,264 (3.8) Interest expended 69,932 58,359 19.8 66,959 4.4 75,132 (6.9) Net interest income 6,132,526 21.4 56,999 5.5 6,132 (.) Other income 25,638 2,14 28.1 25,3 1.1 25,638. Operating income 85,769 69,541 23.3 82,348 4.2 85,769 (.) Operating expenses 38,55 31,7 21.4 34,563 11.5 38,55. -staff expenses 13,256 1,612 24.9 11,325 17. 13,256. Cost-income 44.9 45.7-71bps 42. 297bps 44.9 bps Operating profit,22 37,793 24.9,786 (1.2),22 (.) Non-tax provisions 5,767 2,861 11.5 5,64 2.9 5,766. Profit before tax 41,453 34,932 18.7 42,181 (1.7) 41,453 (.) Taxes 13,384 11,667 14.7 14,236 (6.) 13,384 (.) Tax rate 32.3 33.4-111bps 33.8-146bps 32.3 bps Profit after tax 28,69 23,265 2.6 27,945.4 28,69 (.) Extraordinary income... Profit after tax 28,69 23,265 2.6 27,945.4 28,69 (.) Key takeaways from the Analyst Call: Management expects loan growth to sustain above system and expects share of retail business to increase. Investments in branch network, especially in the rural and semi-rural areas, will help drive CASA and loan growth. The Bank has been gaining market share in the retail, auto, CV and home loans space. NIM would broadly sustain in the existing range. The investment book increased, as the bank participated in the commercial paper market. Floating provision at the end of F15 stood at Rs15.23bn. Sale to ARC in included a single large account. Gross book value of the asset stood at Rs5.5bn (8% worth of value was sold to ARC). The loss arising from this ARC sale has been fully provided for in this quarter and is not going to get amortized over eight quarters. Total outstanding SR at the end of the year stood at Rs2.6bn. There is no large restructuring in the pipeline. The Bank restructured one large account in the road sector during the quarter and has not sold any assets to asset reconstruction companies during the quarter. April 23, 215 18
Advances growth is healthy High NIM drives NII growth (Rs bn) 4, 3, 2, 1, 82 84 85 85 85 86 85 84 84 84 83 82 81 81 86 84 82 8 (Rs mn) 6 45 3 15 17 31 25 24 32 28 21 21 15 16 15 17 23 23 21 32 27 22 16 79 78 29 36 37 39 4 44 45 46 5 52 55 57 6 12 11 Advances (LHS) Share of CASA is stable Credit-deposit (RHS) Fees show improvement NII (LHS) NII growth (RHS) (Rs bn) 2, 1,5 1, 48 46 46 45 45 45 1,4 45 1,694 44 5 48 45 (Rs bn) 24 18 12 1.7 2.1 2. 1.9 1.8 1.8 1.7 1.7 1.8 1.6 1.6 1.4 1.5 1.6 1.6 22 2.5 2. 1.5 1. 5 1,92 1,129 1,194 1,184 1,273 1,289 1,45 1,356 1, 41 1,646 1,6 1,686 41 1,985 4 6 12 15 16 15 15 17 16 16 19 19 18 16 18 21.5. CASA (LHS) CASA share (RHS) Fees & Comm. (LHS) % of avg earnings assets (RHS) Investment in branches leads to rise in costs Asset quality is resilient 8. 51 5 52 84 94 96 (Rs mn) 6. 4. 2.. 52 48 46 46 45 45 5.4 6.3 5.7 5.4 5.8 6.6 6. 5.7 6. 6.8 6.5 6.2 6.4 7.3 7.5 46 4 8 75 71 66 76 65 66 62 62 54 55 51 5 52 46 36 38 31 81 8 82 81 82 8 8 75 74 73 7 73 74 74 74 79 61 44 26 (bps) Avg. profit per branch (LHS) Core cost-income (RHS) NPA coverage (LHS) Annualized NPA prov (RHS) April 23, 215 19
PBV chart (1-year forward) 1,5 1,2 9 6 3 Mar-8 Jul-8 Dec-8 Apr-9 Sep-9 Jan-1 Jun-1 Oct-1 Feb-11 Jul-11 Nov-11 Apr-12 Aug-12 Jan-13 May-13 Oct-13 Feb-14 Jul-14 Nov-14 Price 2.x 3.x 4.x 5.x Historical PBV mean valuations (1-year forward) 5. 4. HDFC Bank is trading just above mean valuation (x) 3. 2. 1. Apr-5 Sep-5 Feb-6 Jul-6 Dec-6 May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 Nov-9 Apr-1 Sep-1 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Mean Deviation +1SD -1SD +2SD -2SD PE chart (1-year forward) 1,4 1,5 7 35 Mar-8 Jul-8 Dec-8 Apr-9 Sep-9 Jan-1 Jun-1 Oct-1 Feb-11 Jul-11 Nov-11 Apr-12 Aug-12 Jan-13 May-13 Oct-13 Feb-14 Jul-14 Nov-14 Prices 1x 15x 2x 25x April 23, 215 2
Roaa decomposition Key Assumptions Y/E March F13 F14 F15e F16e F17e Y/E Mar (Rs mn) F16e F17e Net interest income 4.28 4.14 4.14 4.24 4.28 Balance Sheet Assumptions Other income 1.86 1.78 1.66 1.53 1.48 Credit Growth (%YoY) 24. 25. -Fee-based income 1.4 1.29 1.22 1.16 1.12 Deposits Growth (%YoY) 22.6 25. -Treasury income.3.2.11.2.2 Investments Growth (%YoY) 4.6 23. -Other miscellaneous income.42..34.34.33 CD Ratio 82. 82. Operating income 6.14 5.92 5.8 5.77 5.76 Operating expenses 3.4 2.7 2.59 2.54 2.5 Asset Quality Assumptions Pre-provision profits (PPP) 3.1 3.22 3.22 3.23 3.25 Slippage Ratio 1.2 1.1 Provisions.32.36.38.31.25 Net Recovery Ratio 51.2 51. Profit before taxes 2.78 2.86 2.83 2.92 3. Provisioning Cover 75.8 77.5 Taxes.96.96.94.98 1. Profit after taxes 1.82 1.9 1.89 1.94 1.99 Financials Income statement Ratios Y/E March (Rs mn) F13 F14 F15e F16e F17e Y/E March (Rs mn) F13 F14 F15e F16e F17e Interest earned 35,6 411,355 484,699 592,361 716,893 Earning ratios Interest expended 192,538 226,529 26,742 316,2 378,194 Yield on advances 12.3 11.7 11.1 11.3 11.2 Net interest income 158,111 184,826 223,957 276,117 338,699 Yield on investments 7.5 7.8 7.4 7.4 7.3 Growth 22.7 16.9 21.2 23.3 22.7 Cost of deposits 6. 5.7 5.9 5.8 5.6 Other income 68,526 79,196 89,963 99,54 116,782 Spread 4. 3.9 3.8 3.9 3.9 Fee-based income 51,669 57,3 65,8 75,719 88,97 NIM 4.6 4.4 4.3 4.5 4.5 Treasury income 1,264 1,39 5,817 1,5 1,5 C/I ratio.6 45.6 44.6 44..5 Other miscellaneous income 15,593 2,87 18,33 22,321 26,311 C/I (excl. treasury gains).9 45.8 45.4 44.2.6 Operating income 226,637 264,23 313,92 375,658 455,48 Growth 21.4 16.5 18.9 19.7 21.2 Profitability ratios Operating expenses 112,361 12,422 139,876 165,289 198,134 RoE 2.3 21.3 19.4 18.7 19.8 Staff cost 39,654 41,79,51 57,25 69,3 RoA 1.8 1.9 1.9 1.9 2. Other operating expense 72,77 78,632 92,366 18,265 128,787 OPM 27.3 29.3 3.3 3.4 3.9 Pre-provision profits (PPP) 114,276 1,61 174,45 21,368 257,346 NPM 16. 17.3 17.8 18.3 18.9 Growth 21.7 25.7 21.2 2.9 22.3 Provisions 11,742 15,88 2,758 2,3 2,111 Asset quality Profit before taxes 12,535 127,721 153,287 19,19 237,235 Gross NPAs 1. 1..9.9.8 Taxes 35,272 42,937 51,128 63,656 79,4 Net NPAs.2.3.2.2.2 Tax rate 34.4 33.6 33.4 33.5 33.5 NPA coverage 79.9 72.6 73.9 75.8 77.5 Profit after taxes 67,263 84,784 12,159 126,363 157,762 NNPA/networth 1.3 1.9 1.4 1.3 1.1 Growth 3.2 26. 2.5 23.7 24.8 Capital adequacy ratio Tier-I 11.1 11.8 13.8 13.1 12.4 Balance sheet Tier-II 5.7 4.3 2.9 3. 3. Y/E March (Rs mn) F13 F14 F15e F16e F17e Total 16.8 16.1 16.8 16.1 15.5 Capital 4,759 4,798 5,13 5,26 5,38 Equity Multiplier (x) 11.2 11.2 1.3 9.6 9.9 Reserves & surplus 357,383 429,988 615,81 727,7 855,236 Networth 362,141 4,786 62,94 732,33 86,274 Per share data Deposits 2,962, 3,673,375 4,57,957 5,526,998 6,98,748 O/s shares (mn.) 2,379 2,399 2,57 2,513 2,519 Borrowings 33,66 394,39 452,136 7,3 5,84 EPS 28 35 41 5 63 Other liabilities & provisions 348,642 413,444 324,844 357,329 393,62 Book value per share 152 181 2 291 342 Total liabilities 4,3,319 4,915,995 5,95,31 7,113,79 8,79,167 Adjusted book value 15 178 244 288 338 Dividend per share 6 7 1 9 1 Cash & Bank Balances 272,82 395,836 363,315 4,312 466,824 Advances 2,397,26 3,3,3 3,654,95 4,532,138 5,665,173 Valuations (x) Investments 1,116,136 1,29,511 1,664,6 1,741,4 2,141,712 P/E 35.4 28.3 24.5 19.9 16. Fixed assets 27,31 29,399 31,217 176,64 195,956 P/BV 6.6 5.5 4. 3.4 2.9 Other assets 19,144 251,246 19,9 215,19 239,52 P/ABV 6.7 5.6 4.1 3.5 3. Total assets 4,3,319 4,915,995 5,95,31 7,113,79 8,79,167 Dividend yield.6.7.1.9 1. April 23, 215 21
Recommendation History 13 12 BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 23-Apr-13 689 75 HOLD 17-Jul-13 663 77 BUY 11 15-Oct-13 652 77 BUY 1 9 8 7 6 5 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 21-Jan-14 676 77 BUY 18-Feb-14 66 77 BUY 23-Apr-14 733 86 BUY 21-Jul-14 827 9 HOLD 22-Oct-14 894 964 HOLD 1-1,37 1,25 BUY 23-1,14 1,25 BUY Source: Bloomberg, SSLe SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai -413. Tel.: 91-22-422733/1 Fax: 91-22-42273335 Email: sbicapresearch@sbicapsec.com www.sbismart.com KEY TO INVESTMENT RATINGS (w.e.f. February 213) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -1 to 15 percentage points); 3=SELL (expected to give absolute returns less then - 1 percentage points) DISCLAIMER We, Kaitav Shah, MBA (Finance) Analyst and Sanket Chheda (MBA Finance) Research Associate authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuers or securities. This report has been prepared based upon information available to the public and sources, believed to be reliable. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this report. SBICAP Securities Limited (SSL),a full service Stock Broking Company and a member of National Stock Exchange of India Ltd. 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