. Volume No.. V Issue No. 182 HDFC Bank AugustAug. 1 414,, 2018 2018 BSE Code: 500180 . NSE Code: HDFCBANK Reuters Code: HDBK.NS Bloomberg Code: HDFCB:IN Enviable performance to continue… Market Data HDFC Bank, a new-generation bank, is the second largest private sector bank in India. The Bank has a nationwide distribution network of 4,804 branches and Rating BUY 12,808 ATM's in 2,666 cities/towns as of Q1FY19. The bank has grown its CMP (Rs.) 2,091 balance sheet at a healthy pace of 22% CAGR over FY13-18 maintaining high Target (Rs.) 2,388 profit CAGR of 21%. Potential Upside 14% Investment Rationale Duration Long Term Above industry growth rate in advances to continue: HDFC Bank continued Face Value (Rs.) 2 to report strong loan growth of 22% YoY in Q1FY19 (↑18% YoY in FY18) led by 52 week H/L (Rs.) 2,219/1,685 26% YoY growth in retail and 18% YoY growth in corporate loans. Going Adj. all time High (Rs.) 2,219 forward, we expect the bank to continue to outpace the industry growth rate (13%) and factor 20% CAGR in advances over FY18-20E as the bank is well- Decline from 52WH (%) 4.7 poised to capture a higher share of the incremental credit demand. Rise from 52WL (%) 25.5 Time-tested growth strategy will help maintain stable margins: HDFC Bank Beta 1.2 has consistently maintained its net interest margin (NIM) at a superior level of Mkt. Cap (Rs.Cr) 544,438 ~4.5%+ over the last five years even as market yields in the overall economy were falling. Even though NIM declined by 20 bps YoY to 4.6% in Q1FY19, we Fiscal Year Ended expect NIM (calc) o remain above 4.5% over FY18-20E as the bank believes Y/E FY17 FY18 FY19E FY20E that the interest rate cycle has bottomed out and has recently increased MCLR Interest Income 69,306 80,241 94,936 112,775 in order to offset the pressure on funding cost. (Rs.Cr) Interest Expense Asset quality risks well in control: HDFC bank’s asset quality trend 36,167 40,146 47,353 55,642 continues to be relatively stronger than peers despite challenging macro (Rs.Cr) Net Interest environment largely due to stringent credit origination practices, relentless 33,139 40,095 47,583 57,133 Income (Rs. Cr) monitoring system and adequate provisioning. Notably, Gross NPA ratio has Pre Pro Profit 25,732 32,625 39,267 47,760 remained around 1% during the last eight years whereas restructured loans (Rs. Cr) remain miniscule which provides further comfort. Hence, we don’t expect any EPS 56.8 67.4 80.5 97.6 major negative surprises on the asset quality front over near to medium term. P/E (x) 31.0 26.0 21.4 31.0 Efficiency gains to drive profitability: Superior asset quality and faster than P/BV (x) 5.1 4.4 3.7 5.1 systemic credit growth has enabled HDFC Bank to maintain the earnings P/ABV (x) 5.2 4.5 3.9 5.2 momentum. Further, HDFC Bank has gradually reduced its C/I ratio (from ROE (%) 17.9 17.9 18.2 18.9 49.6% in FY13 to 41% in FY18) through increasing automation of processes ROA (%) 1.8 1.8 1.9 1.9 across the bank. As a result, HDFC Bank’s net profit has grown at a robust pace of 21% CAGR over FY13-18. Going forward, return ratios are expected to One-year Price Chart improve further on the back of- a) cost-income ratio is likely to come down as digitization plays a key role from client’s acquisition to disbursement; b) credit 2500 cost was elevated in last year due to higher Agri slippage which is likely to HDFC Bank Sensex (rebased) remain moderate and hence a comparatively lower credit cost. 2000 Valuation: HDFC Bank delivered another quarter (Q1FY19) with strong and 1500 stable performance. We are structurally positive on the bank given its top- 1000 notch asset quality, robust retail franchise, strong balance sheet growth and Jul-18 Jan-18 Jun-18 Oct-17 Feb-18 Sep-17 Dec-17 Apr-18 Mar-18 Aug-17 Aug-18 Nov-17 best-in-class management pedigree. Further, with its recent capital raising plan May-18 of Rs24,000cr, the bank is expected to accelerate balance sheet growth from here and continue gaining market share in both assets and liabilities. We Shareholding Pattern Jun-18 Mar-18 Chg. 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 Promoters (%) 25.5 25.6 (0.1) valuation within banking space. Hence, we maintain a BUY rating on the stock Public (%) 74.5 74.4 0.1 with a target price (TP) of Rs2,388 (4.4x FY20E P/ABV). For private circulation only HDFC Bank - Company Overview HDFC Bank, a new-generation bank, is the second largest private sector bank (in terms of assets) in India. The Bank has a nationwide distribution network of 4,804 branches and HDFC Bank is the second 12,808 ATM's in 2,666 cities/towns as of Q1FY19. The bank has grown its balance sheet at a largest private sector bank in healthy pace of 22% CAGR over FY13-18 maintaining high profit CAGR of 21%. India. Above industry growth rate in advances to continue HDFC Bank continued to report strong loan growth of 22% YoY in Q1FY19 (↑18% YoY in FY18) 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). Going forward, we expect the bank to continue to outpace the industry growth rate (13%) and factor 20% CAGR in advances over FY18-20E as the bank is well-poised to capture a higher share of the incremental credit demand. Advances to grow at a CAGR of 20% over FY18-20E 1,000,000 26.4% 27.1% 30% 22.7% 20.6% 800,000 19.4% 18.7% 19.4% 20.0% 20% 600,000 942,944 400,000 785,786 658,333 554,568 10% 200,000 365,495 464,594 239,721 303,000 0 0% FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Advances (Rs cr) Advances Growth (%) Source: Company, In-house research Strong retail liability franchise HDFC Bank enjoys superior liability franchise and scores one of the highest CASA ratio in the financial space. The bank has successfully maintained CASA ratio above 43% over the last five years which benefits it with the lowest cost of funds compared to peers. Further, with a decrease in savings rate, we expect the cost of funds to decline further for the bank. With 4,804 branches and focus on retail banking, we expect the CASA Ratio to remain in the high range of 40%-45%. We expect deposits to growth at a CAGR of 17% over FY18-20E driven by the strong traction in retail deposits. CASA ratio is one of the best in the industry 100% 80% 52.6% 55.2% 56.0% 56.8% 52.0% 56.5% 57.9% 59.3% 60% 47.4% 48.0% 44.8% 44.0% 43.2% 43.5% 42.1% 40.7% 40% 29.8% 30.1% 28.1% 27.7% 27.1% 28.4% 27.9% 27.4% 20% 17.7% 16.7% 16.3% 16.2% 18.0% 15.1% 14.2% 13.3% 0% FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Current Savings Term CASA Source: Company, In-house research Time-tested growth strategy will help maintain stable margins HDFC Bank has consistently maintained its NIM (calc) at a superior level of ~4.5%+ over the last five years even as market yields in the overall economy were falling. The higher proportion of unsecured retail loans in the bank’s portfolio has aided in maintaining the net interest margins. Even though NIM declined by 20 bps YoY to 4.6% in Q1FY19, we expect NIM (calc) o remain above 4.5% over FY18-20E as 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. NIM (calc) to remain above 4.5% mark over FY18-20E 10.9 10.6 12.0 10.1 10.4 9.9 9.6 9.8 10.0 10.0 8.0 6.4 6.2 6.0 5.8 5.5 6.0 4.9 4.8 4.9 4.0 4.9 4.8 4.7 4.8 4.7 4.8 4.6 4.7 2.0 0.0 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Yield on Funds (%) NIM (%) Cost of Fund (%) Source: Company, In-house research Asset quality risks well in control HDFC bank’s asset quality trend continues to be relatively stronger than peers despite challenging macro environment largely due to stringent credit origination practices, relentless monitoring system and adequate provisioning. Notably, Gross and Net non-performing asset (NPA) ratios of the bank remain broadly stable in Q1FY19 at 1.3% (↑3 bps QoQ) and 0.4% (↑1 bps QoQ), respectively. 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.