In line results; loan growth holding nicely February 14, 2015 Nitin Kumar nitinkumar@plindia.com +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com +91 22 66322232 Rating BUY Price Rs1,066 Target Price Rs1,200 Implied Upside 12.6% Sensex 29,095 Nifty 8,806 (Prices as on February 14, 2015) Trading data Market Cap. (Rs bn) 2,556.9 Shares o/s (m) 2,399.1 3M Avg. Daily value (Rs m) 3985 Major shareholders Promoters 21.70% Foreign 32.61% Domestic Inst. 9.99% Public & Other 35.70% Stock Performance (%) 1M 6M 12M Absolute 10.6 28.9 66.1 Relative 7.1 17.5 23.2 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2016 51.3 52.6 2.4 2017 63.5 64.8 2.0 Price Performance (RIC:HDBK.BO, BB:HDFCB IN) (Rs) 1,200 1,000 800 600 400 200 0 Feb 14 Apr 14 Source: Bloomberg Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 HDFCB reported Q3FY15 PAT was in line with our estimates at Rs27.9bn (PLe: Rs28.4bn) as higher treasury gains offset 44% YoY rise in loan loss provisions. NII grew 23% YoY on back of healthy loan growth while margins compressed by 10bp QoQ to 4.4%. Other income improved in a seasonally strong quarter and was further boosted by robust treasury gains while controlled operating expenses pulled operating profit growth to 23% YoY. Asset quality remained stable however absence of any provisioning write back, slightly higher general provisions and a bit of excess loan loss provisioning as coverage ratio improved resulted in higher credit cost. Going ahead, opex leverage will continue as business prospects improve from new branch additions. We retain our positive view with PT of Rs1,200 at 3.7x Mar 17 ABV. Revenue growth maintains momentum; treasury gain further helps: HDFCB delivered ~18% YoY growth in core operating profits as (1) NII growth was robust on back of healthy loan growth and better retail mix (healthy growth in auto loans, personal loans, loan against shares and credit cards). Margins declined by 10bp as proportion of wholesale loans increased while CASA mix declined by 230bps QoQ. (2) Core fee growth of ~15% was better on higher volumes in third party distribution products (3) Opex was under control flattish sequentially, as bank added 59 branches and 914 employees during the quarter. Management expects opex synergies to continue while business prospects improve from new branches. Loan growth remains healthy; retail mix declines by 83bp: Overall loan growth stood at 17% YoY (6% QoQ) led by healthy growth in wholesale book. The mix of wholesale loans has increased by ~450bp YoY to ~52.5%. HDFCB indicated healthy loan growth prospects on underlying improvement in product segments where it has notable market share, and as it benefits from increasing footprint. Asset quality stable, stress abating in CVs: GNPLs stood stable while healthy provisioning helped slight reduction in Net NPLs. CVs portfolio which was seeing some stress in last few quarters is now showing stabilising signs. Management seemed comfortable with continued build up in unsecured book and does not see large slippages, which will keep credit cost at current levels of 50 60bps. Key financials ( Y/e March) 2014 2015E 2016E 2017E Net interest income (Rs m) 184,826 221,163 268,326 326,426 Growth (%) 16.9 19.7 21.3 21.7 Operating profit (Rs m) 143,601 174,508 216,432 268,380 PAT (Rs m) 84,784 103,313 127,413 157,752 EPS (Rs) 35.5 42.3 51.3 63.5 Growth (%) 24.7 19.2 21.2 23.8 Net DPS (Rs) 6.8 7.4 9.0 10.5 Profitability & Valuation 2014 2015E 2016E 2017E NIM (%) 4.14 4.12 4.21 4.23 RoAE (%) 21.3 19.7 19.1 20.2 RoAA (%) 1.90 1.92 2.00 2.04 P / BV (x) 5.9 4.3 3.7 3.1 P / ABV (x) 6.2 4.5 3.9 3.3 PE (x) 30.0 25.2 20.8 16.8 Net dividend yield (%) 0.6 0.7 0.8 1.0 Source: Company Data; PL Research Q3FY15 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q3FY15 Financials Core performance robust, but higher provisions limit PAT growth (Rs m) 3QFY15 3QFY14 YoY gr. (%) 2QFY15 QoQ gr. (%) Interest income 123,958 105,907 17.0 118,476 4.6 Interest Expended 66,959 59,559 12.4 63,366 5.7 Net interest income (NII) 56,999 46,348 23.0 55,110 3.4 Treasury income 2,655 509 421.6 951 179.2 Other income 25,349 21,483 18.0 20,471 23.8 Total income 82,348 67,830 21.4 75,581 9.0 Operating expenses 34,563 28,951 19.4 34,979 (1.2) Staff expenses 11,325 9,730 16.4 11,669 (2.9) Other expenses 23,238 19,221 20.9 23,310 (0.3) Operating profit 47,786 38,880 22.9 40,602 17.7 Core operating profit 45,131 38,371 17.6 39,651 13.8 Total provisions 5,604 3,888 44.1 4,559 22.9 Profit before tax 42,181 34,991 20.5 36,043 17.0 Tax 14,236 11,734 21.3 12,228 16.4 Profit after tax 27,945 23,257 20.2 23,815 17.3 Balance sheet (Rs mn) Deposits 4,141,283 3,492,152 18.6 3,906,818 6.0 Advances 3,470,880 2,967,416 17.0 3,272,728 6.1 Gross NPL (Rs mn) 34,679 30,178 14.9 33,617 3.2 Net NPL (Rs mn) 9,037 7,973 13.3 9,173 (1.5) Restructured Assets (Rs mn) 3,506 5,995 (41.5) 3,306 6.0 Profitability ratios Yield on Advances 11.3 11.6 (26) 11.5 (20) Cost of Funds 6.1 6.4 (33) 6.1 0 NIM 4.4 4.2 20 4.5 (10) RoaA 2.1 2.1 7 1.9 24 RoaE 22.3 22.3 (5) 20.7 160 Asset Quality Gross NPL ratio 1.0 1.0 1.0 (2) Net NPL ratio 0.3 0.3 0.3 2 Coverage ratio 73.9 73.6 36 72.7 123 Rest. assets/ Total adv. 0.1 0.2 (10) 0.1 (0) Business & Other Ratios Low cost deposit mix 40.9 43.7 (280) 43.2 (230) Cost income ratio 42.0 42.7 (71) 46.3 (431) Non int. inc / total income 30.8 31.7 (89) 27.1 370 Credit deposit ratio 83.8 85.0 (116) 83.8 4 CAR 15.7 14.7 100 15.7 Tier I 12.0 9.9 207 11.8 17 February 14, 2015 2
Key Q3FY15 Concall Highlights: Balance sheet & Outlook Can comfortably grow above industry (5 6% gap with industry) which will be from cross sell products, increasing suite of products to increased customers and new branches. CV/CE book CV book has seen some bottoming out as disbursements and payments have been offsetting compared to where disbursements were muted few quarters back. 10 15% is used vehicle financing. Wholesale book 75% large corporate book and 25% emerging corporate. Business banking is 60% of the total business banking book. Housing loans Bought out Rs12bn of housing loans. Overseas advances at 7% of total advances. Fee income Fee income Pickup was mainly partly from in payment products (one off) and other has been from Third party distribution products like MFs (equity). Also is seasonally stronger on festive spending. 90% fee income is retail and 10% wholesale. Outlook Do not see fee income growth to match loan growth or NII growth as fee is less asset based and more transaction based. Treasury More of a function of sharp drop in Yields in the market. Have been able to book decent gains on treasury. Opex Opex growth showed increasing trends on lower base in, while some hiring took place in. Management looks to keep opex growth under control. Margins Margins to retain current levels, though management has been guiding for some aberration in margins from few quarters back on increased competitive intensity Yields on KGC are at 11 11.25% Asset Quality Retail asset quality has been stable. Concerns on the CV & Const Equipment have now abated and stabilized on NPA. On wholesale asset quality slight movement in some corporate has been there in SMA 2 etc, but no large slippages this quarter. February 14, 2015 3
Provisions have been high as had w.back of Rs1.2bn in contingent provisions and in Rs300mn floating provisions were drawn which was not drawn in. Outstanding floating provisions are Rs17bn. Provisions break up Rs4.9bn Specific provisions, Rs0.6bn general provisions and balance contingent provisions. Others Capital raise will improve Tier 1 by ~200bps from xx as of Dec 14. Capital raising gives the strength if the economy gains momentum in next one year. No of serving employees at 76,000 Overall loan growth of 17% YoY remained decent mainly being led by non retail book (now coming off), while retail book loan book remains in lower double digit but has picked up sequentially. Retail loan book Loan growth has been led by home loans, unsecured retail and partly auto loans (non CV). CV/CE loans continue to show display sluggish growth but management mentioned disbursements have picked up.. Exhibit 2: Wholesale loans lead loan growth; parts of retail loan book doing well. Loan Composition (Rs m) 3QFY15 3QFY14 YoY gr. (%) 2QFY15 QoQ gr. (%) Car Loans 400,140 335,940 19.1 377,780 5.9 CV loans 132,120 167,450 (21.1) 138,570 (4.7) 2 wheeler loans 39,590 32,620 21.4 36,240 9.2 Sub total Auto Loans 571,850 536,010 6.7 552,590 3.5 Personal loans 248,040 200,830 23.5 231,370 7.2 Business banking 213,400 266,160 (19.8) 219,630 (2.8) Loan against shares 11,940 10,190 17.2 10,500 13.7 Credit Cards 153,640 117,130 31.2 140,050 9.7 Home loans 199,770 161,260 23.9 195,580 2.1 Gold Loans 39,010 41,110 (5.1) 38,600 1.1 Other Retail 210,690 143,560 46.8 192,940 9.2 Retail Loans 1,648,340 1,476,250 11.7 1,581,260 4.2 Non Retail Loans 1,822,540 1,491,166 22.2 1,691,468 7.7 Exhibit 3: Wholesale loan book growth has normalised in quarter while retail has picked up from sequentially quarters 50% Retail Loan growth (%) Wholesale Loan growth (%) 40% 20% 10% 0% February 14, 2015 4
Exhibit 4: Core fees growth has picked up partly from one offs and robust distribution income from Third party products 35.0% Core fees growth YoY 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 5.0% 10.0% Exhibit 5: Margin slightly comes off sequentially 5.00% NIM (%) 4.75% 4.50% 4.25% 4.00% 3.75% 3.50% Exhibit 6: CASA ratios have come off on robust increase in term deposits during the quarter. 60% 50% 40% 20% 10% 0% CA Ratio (%) SA Ratio (%) 31% 29% 29% 27% 28% 28% 28% 27% 22% 18% 17% 17.5% 18.4% 16.2% 17.0% 16.5% 17.7% 15.2% 15.2% 16.6% 16.7% 14.6% 14.8% 13.8% Exhibit 7: Opex expenses slightly inches up on staff expenses on some hiring and from lower base of. 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 10.0% Employee expenses growth YoY Other Opex growth YoY February 14, 2015 5
Exhibit 8: Asset quality trends remained stable during the quarter 1.20% 1.10% 1.00% 0.90% 0.80% 0.70% Gross NPA (%) Net NPA (%) 0.40% 0.35% 0. 0.25% 0.20% 0.60% 0.15% Exhibit 9: HDFCB s Mar 17 PT of Rs1200 based on 3.7x Mar 17 book PT calculation and upside Fair price EVA 1,198 Fair price P/ABV 1,201 Average of the two 1,200 Target P/ABV 3.7 Target P/E 18.9 Current price, Rs 1060 Upside (%) 13% Dividend yield (%) 1% Total return (%) 14% Exhibit 10: ROAs to move towards ~2% in FY17E on loan growth, better margins & lower credit cost RoA decomposition FY12 FY13 FY14 FY15E FY16E FY17E Interest income 9.06 9.50 9.22 9.14 9.03 8.96 Interest expenses 4.87 5.22 5.08 5.03 4.82 4.73 Net interest income 4.19 4.28 4.14 4.12 4.21 4.23 Treasury income 0.38 0.28 0.32 0.31 0.31 0.31 Other Inc. from operations 1.50 1.57 1.46 1.31 1.26 1.22 Total income 6.07 6.14 5.92 5.74 5.78 5.76 Employee expenses 1.11 1.07 0.94 0.84 0.79 0.74 Other operating expenses 1.91 1.97 1.76 1.65 1.60 1.55 Operating profit 3.05 3.10 3.22 3.25 3.40 3.48 Tax 0.76 0.82 0.96 0.95 0.98 1.01 Loan loss provisions 0.61 0.45 0.36 0.38 0.41 0.43 Net profit 1.68 1.82 1.90 1.92 2.00 2.04 February 14, 2015 6
Income Statement (Rs m) Int. Earned from Adv. 316,869 380,302 445,831 542,095 Int. Earned from Invt. 90,368 105,975 123,944 141,889 Others 4,118 5,118 5,840 7,076 Total Interest Income 411,355 491,394 575,615 691,060 Interest expense 226,529 270,231 307,289 364,634 NII 184,826 221,163 268,326 326,426 Growth (%) 16.9 19.7 21.3 21.7 Treasury Income 65 NTNII 79,131 87,116 100,183 118,216 Non Interest Income 79,196 87,116 100,183 118,216 Total Income 490,552 578,510 675,799 809,276 Growth (%) 17.0 17.9 16.8 19.8 Operating Expense 120,422 133,771 152,077 176,262 Operating Profit 143,601 174,508 216,432 268,380 Growth (%) 25.7 21.5 24.0 24.0 NPA Provisions 16,326 18,359 23,362 28,733 Investment Provisions (41) (37) (33) (30) Total Provisions 15,873 20,310 26,263 32,929 PBT 127,728 154,198 190,169 235,450 Tax Provisions 42,944 50,885 62,756 77,699 Effective Tax Rate (%) 33.6 33.0 33.0 33.0 PAT 84,784 103,313 127,413 157,752 Growth (%) 26.0 21.9 23.3 23.8 Balance Sheet (Rs m) Par Value 2 2 2 2 No. of equity shares 2,399 2,484 2,484 2,484 Equity 4,798 4,968 4,968 4,968 Networth 434,786 615,461 716,721 843,960 Adj. Networth 426,586 605,989 707,587 832,404 Deposits 3,673,375 4,253,768 5,044,969 6,280,986 Growth (%) 24.0 15.8 18.6 24.5 Low Cost deposits 1,646,214 1,884,419 2,310,596 2,926,940 % of total deposits 44.8 44.3 45.8 46.6 Total Liabilities 4,915,995 5,831,349 6,918,204 8,513,242 Net Advances 3,030,003 3,526,923 4,260,523 5,317,133 Growth (%) 26.4 16.4 20.8 24.8 Investments 1,209,511 1,511,125 1,711,613 2,025,629 Total Assets 4,915,995 5,831,349 6,918,204 8,513,242. Quarterly Financials (Rs m) Y/e March Q4FY14 Q1FY15 Q2FY15 Q3FY15 Interest Income 107,886 112,201 118,476 123,958 Interest Expense 58,359 60,485 63,366 66,959 Net Interest Income 49,526 51,716 55,110 56,999 Non Interest Income 20,014 18,506 20,471 25,349 CEB 15,212 14,065 15,365 18,065 Treasury 333 250 951 2,655 Net Total Income 69,541 70,222 75,581 82,348 Operating Expenses 31,747 31,784 34,979 34,563 Employee Expenses 10,612 11,259 11,669 11,325 Other Expenses 21,135 20,525 23,310 23,238 Operating Profit 37,793 38,438 40,602 47,786 Core Operating Profit 37,460 38,188 39,651 45,131 Provisions 2,861 4,828 4,559 5,604 Loan loss provisions Investment Depreciation Profit before tax 34,932 33,610 36,043 42,181 Tax 11,667 11,280 12,228 14,236 PAT before EO 23,265 22,330 23,815 27,945 Extraordinary item PAT 23,265 22,330 23,815 27,945 Key Ratios CMP (Rs) 1,066 1,066 1,066 1,066 Equity Shrs. Os. (m) 2,399 2,484 2,484 2,484 Market Cap (Rs m) 2,556,908 2,647,228 2,647,228 2,647,228 M/Cap to AUM (%) 52.0 45.4 38.3 31.1 EPS (Rs) 35.5 42.3 51.3 63.5 Book Value (Rs) 181 248 289 340 Adj. BV (100%) (Rs) 171 236 276 325 P/E (x) 30.0 25.2 20.8 16.8 P/BV (x) 5.9 4.3 3.7 3.1 P/ABV (x) 6.2 4.5 3.9 3.3 DPS (Rs) 6.8 7.4 9.0 10.5 Dividend Yield (%) 0.6 0.7 0.8 1.0 Profitability (%) NIM 4.1 4.1 4.2 4.2 RoAA 1.9 1.9 2.0 2.0 RoAE 21.3 19.7 19.1 20.2 Efficiency Cost Income Ratio (%) 45.6 43.4 41.3 39.6 C D Ratio (%) 82.5 82.9 84.5 84.7 Business per Emp. (Rs m) 98 107 119 135 Profit per Emp. (Rs lacs) 12.4 14.2 16.3 18.4 Business per Branch (Rs m) 596 628 671 760 Profit per Branch (Rs m) 8 8 9 10 Asset Quality Gross NPAs (Rs m) 29,893 33,170 38,504 47,792 Net NPAs (Rs m) 8,200 9,472 9,133 11,557 Gr. NPAs to Gross Adv. (%) 1.0 0.9 0.9 0.9 Net NPAs to Net Adv. (%) 0.3 0.3 0.2 0.2 NPA Coverage (%) 72.6 71.4 76.3 75.8. February 14, 2015 7
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