25TH November, 2010 Banking , Financial Services & Insurance

RESEARCH REPORT
HDFC Bank RECOMMENDATION: BUY

SREI Infrastructure
Investment Finance Ltd.
rationale: 26th
Recommendation March 2010
Rating Buy  HDFC Bank’s strong and profitable growth over the last five years (FY2005–10)
Target 2514 was supported by significant traction in CASA market share (from 3.3% in
Target period 12 months FY2005 to 5.2% in FY2010). The bank’s dominant transaction banking business
Potential upside 9.3% lies at the core of the bank’s strength in CASA deposits. Moreover, the merger
of CBoP expanded the bank’s branch network by a 30% CAGR during FY2005–
10. By increasing CASA mobilisation at branches, leveraging its comprehensive
Key Financials
product range and strong brand, I believe HDFC Bank would be in a position to
In `Cr FY09 FY10 FY11E FY12E
NII 7421 8387 10523 13552
extract substantial operating leverage, improve NIM and cross-sell
PAT 2245 2949 3915 5490  Apart from traditional CEB and Forex income, the bank earns substantial fee
EPS(`) 52.8 64.4 85.5 119.9 income from transaction banking, cards and third-party distribution, among
others. Overall, core fee income grew at a 30% CAGR over FY2008–10; and at
about 1.7% of ATA in FY2010, it was one of the best in the sector and marked
Valuation another significant competitive advantage over peers benefits.
In `Cr FY09 FY10 FY11E FY12E  The bank’s capital adequacy stood at 16.3%, with Tier-1 comprising a
NP 2245 2949 3915 5490 substantial 76.1% share. I expect capital adequacy to remain strong over the
P/E 39 32 24 17.1
next two years, which is ideal in the current environment
P/BV 5.9 4.4 3.8 3.3
RoA 1.4 1.5 1.6 1.7
RoE 16.9 16.1 17 20.6 Key Highlights

Stock Information  A strong 7.7% QoQ growth in core operating profit without diluting asset
Mkt. Cap Rs 1,109,535mn quality (Gross NPA ratio stands at 1.2%) was the highlight of Q2FY2011 results.
52week H/L Rs. 2540/1549 This is way ahead of industry, which is around 2.8%. The net profit grew at
Beta 0.9 32.7% YoY.
3M avg. Daily volume 1 mn  The NII has grown by strong 5.2% QoQ where the main driver was growth in
CMP 2295 advances by 32% keeping NIMs stable
 Improved market share in advances(4.6%) and deposits(4.1%). CASA improved
Price Performance
1M 3M 12m by over 140 basis to 50.61%
Absolute -0.1 17.6 40.8
Relative -2.9 4.7 21.0 Valuation & Outlook

I believe HDFC Bank is among the most competitive banks in the sector, with an A-list
management team that has one of the best track records in the sector. At the CMP,
the stock is trading at 17.1x FY2012E EPS of Rs119.9 and 3.3x FY2012E ABV of Rs629. I
believe HDFC Bank is once again positioned for a high qualitative growth trajectory,
with the CASA and cost-to-income ratios returning to pre-CBoP levels. In my view, with
its strong capital adequacy and substantial branch expansion, the bank is set to further
gain CASA market share and achieve strong growth in fee income, as the economic
environment continues to improve. HDFC Bank has commanded a 32.8 premium to the
Sensex in terms of its oneyear forward P/E multiple over the last five years. I expect
the premium to be around its historical average on account of the bank’s robust
growth and RoE prospects over the next two years. On the basis of the increase in
Student Analyst Sensex valuations and my 17x target FY2012E P/E multiple for the Sensex, I am also
Rishabh Bhandari increasing my target multiple for HDFC Bank. I now value the stock at 4.0x FY2012E
rishabh.bhandari@nmims.edu
+91-9892904200
ABV of Rs629 to arrive at a target price of Rs2,514, implying an upside of 23%. Hence, I
recommend a Buy on the stock
HDFC BANK

Key Investment arguments

Advances Mix
Rs Bn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ(%) % of total
Retail
Strong growth in advances was led by advances 627 663 720 761 820 30.8 7.7 52.2
wholesale advances which grew by 7.4% Wholesale
QoQ. The proportion of wholesale advances 510 534 539 702 751 47.3 7.1 47.8
advances in total advances stood at 48%. Total 1,137 1,196 1,258 1,462 1,571 38.2 7.4 100

CASA Mix
Rs Bn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ(%)
Savings Deposits 322 333 372 362 394 22.3 8.8

Despite strong growth in advances, the Current Deposits 432 467 499 539 595 37.6 10.5
CASA was maintained at 50.6% for the
CASA 754 800 871 900 989 31.1 9.8
quarter, an expansion of 28bps YoY
Term Deposits 744 748 803 930 964 29.6 3.7

Total Deposits 1,498 1,548 1,674 1,830 1,953 30.4 6.7

CASA (%) 50.3 51.7 52 49.2 50.6 28bps 144bps

Fee Based Income

Rs Mn Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 YoY (%) QoQ(%)
The other income declined by 4.6% yoy
Fee/Commission
during the quarter due to treasury losses income 6,924 7,237 7,653 7,457 8,570 23.8 14.9
of Rs521mn during the quarter compared Trading gains/(losses) 1,629 -265 -473 224 -521
to gains of Rs1.6bn in Q2FY10. The fee Others 1,519 1,558 1,856 1,718 1,558 2.6 -9.3
income grew by 15% qoq. Total 10,072 8,530 9,036 9,399 9,607 -4.6 2.2

Yield analysis
% Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 QoQ(bps)
Net Interest Income in line with Yield on advances 11.1 10 9.9 9.7 9.7 -5
expectations - HDFC Bank’s NII has grown Yield on Investments 6.5 6.5 6.6 7.1 7.1 1
by 29.2% YoY to Rs25.3bn driven by 38% Yield on Assets 8.4 8.1 7.6 7.8 8 20
YoY growth in advances (7.4% QoQ) and Cost of funds 4.3 3.6 3.2 3.5 3.8 24
NIM (Reported) 4.2 4.2 4.4 4.3 4.2 -10bps
stable NIMs

25 November, 2010 Page 2

HDFC BANK

No surprises on asset quality, non-interest income growth a concern GNPA @1.2%,

Maintained Asset quality but non-interest
income growth an issue
NNPA @ 0.3% as against 1.8% GNPA and 0.5% NNPA in Q2FY10 looks very healthy. The
NPA provision coverage ratio (excluding write-offs) stands at 78%. Total cumulative
restructured assets were at 0.3% of the bank’s gross advances, which is the lowest in
the industry. The bank reported a fourth consecutive dip in non-interest income to Rs
961 crore. MTM hit of Rs 52 crore in Q12FY11 against profit of Rs 151 crore in Q2FY10
was a drag.

Key Financials

Particulars FY2009 FY2010 FY2011E FY2012E

NII (Rs. Cr 7421 8387 10523 13552
% Chg 42 13 25.5 28.8
Net profit (Rs. Cr) 2245 2949 3915 5490
% Chg 41.2 31.3 32.8 40.2
NIM (%) 4.9 4.3 4.3 4.4
EPS (Rs.) 52.8 64.4 85.5 119.9
P/E (x) 39 32 24 17.1
P/ABV (x) 5.9 4.4 3.8 3.3
RoA (%) 1.4 1.5 1.6 1.7
RoE (%) 16.9 16.1 17 20.6

Investment Concerns

Provisioning risks: Given the risks of restructured loans being unrecoverable, the
possibility of incremental slippages in asset quality cannot be ruled out. There may also
be cases of standard assets deteriorating to doubtful or loss assets for banks that
otherwise have adequate risk provisions. In order to sustain a low net NPA ratio, HDFC
Bank may have to provide higher for additional slippages in its asset book. While the
bank had NPA coverage ratio of 78% at the end of September 2010 (well above RBI's
mandate of 70%), we have provided for any contingent liabilities on these accounts in
my forward estimates.

Fee income support: lagging Fee support may weaken: Although HDFC Bank has been
able to sustain its fee income to total income ratio at above 25% over the last 5
financial years, the proportion of the same may not be sustained going forward.

This can primarily be attributed to the fact that the bank has been losing share in cash
management services to new players in the industry and at the same time not able to
catch up on alternative fee income streams. As a result, smaller players like Axis Bank
and Yes Bank have surpassed it in terms of fee income contribution to total income. As
lower treasury gains in a rising interest rate scenario may reduce the proportion of non
fund based income to total income.

25 November, 2010 Page 3

HDFC BANK

Comparison with peers: (Q2FY10)

Kotak
Axis Bank HDFC Bank ICICI Bank Mahindra YES Bank Andhra BoB BoI Canara SBI
Bank
Growth ratios
Non-Interest Income 18% 16% 14.30% 23% -2.96% 25.36% 14.40% -13.53% - 13.62%
Net Interest Income 40.50% 29.20% 8.30% 24% 77.90% 52.04% 46.80% 26.14% 52.50% 44.68%
Advances 36.50% 32.00% 5.30% 40% 86.30% 26.64% 29.60% 22.36% 20.20% 19.47%
Deposits 35.72% 30.40% 11% 50.00% 106.60% 26.18% 30.10% 20.57% 21.00% 10.67%
Net profit 38% 32.70% 21.80% 55% 57.80% 10.58% 60.70% 90.00% 10.70% 14.86%
Yield Measurement Ratios
Net Interest Margin 3.30% 4.20% 2.60% 5.60% 3% 3.91% 3.02% 2.81% 3.16% 3%
Balance Sheet Ratios
Credit-Deposit Ratio 76% 68% 75.80% 76.86% 85% 73% 72.26% 74.70%
CASA Ratio 41.55% 50.60% 44% 29% 10.10% 30.40% 35.89% 33% 30% 47.79%
CAR-Basel 2 (%) 13.68% 17% 20.20% 19.40% 19.40% 12.41% 13% 13.04% 13.88% 13.20%
Asset Quality Ratios
Gross NPA (%) 1.12% 1.16% 5.03% 1.82% 0.22% 1.26% 0.38% 2.64% 1.49% 3.35%
Net NPA (%) 0.34% 0.30% 1.37% 0.68% 0.06% 0.49% 1.39% 1.04% 1.06% 1.70%
Provision Coverage Ratio 80.17% 77.80% 69% 70.10% 78.43% 78.85% 74.90% 70% 77.06% 62.78%
Profitability Ratios
RoA 1.50% 1.60% 1.31% 1.76% 1.50% 1.37% 1.34% 0.87% 1.52% 0.97%
Efficiency Ratios
Cost to Income Ratio 43.90% 47.50% 41% 75.70% 36.60% 42.06% 39.08% 42% 40.73% 45.96%
Valuations
P/E 23 38.57 27.95 22.69 18.61 8.3 11.8 14.6 10.6 21.3
P/BV 3.9 5.6 2.54 2.4 3.2 1.9 2.3 1.9 2.5 2.9
Others
Cost of Funds 4.75% 3.80% 5.80% 5.60% 6.70% 5.25% 5.65% 5.25%
Business Ratios
Interest Income as % Working Funds 7.73% 8.39% 7.19% 9.96% 8.89% 8.59% 6.86% 7.14% - 6.80%
Operating Profit as % Working Fund 3.48% 3.33% 2.72% 3.97% 2.75% 2.35% 2.03% 1.88% - 1.75%
RoA 1.50% 1.60% 1.31% 1.72% 1.50% 1.37% 1.34% 0.87% 1.52% 0.97%
Business per Employee 111,100,000 59,000,000 102,900,000 48,700,000 152,670,000 92,500,000 91,400,000 102,800,000 106,000,000 63,600,000
Profit per Employee 1,200,000 598,000 1,200,000 700,000 1,575,000 899,000 600,000 1,333,000 736,000 473,770

Forecasts FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Particulars % FY2011E FY2012E Valuation Ratios
Credit Growth 26 27 PER (x) 73.7 57.4 45.7 38.9 31.8 24 17.1
Deposit Growth 27 26 P/ABVPS (x) 12.2 10.2 6.4 5.8 4.4 3.8 3.3
Dividend
CASA Ratio 52.2 52
yield 0.3 0.3 0.4 0.4 0.6 0.8 1.1
NIMs 4.3 4.4 DuPont Analysis
Other Income Growth 12.5 28.1 NII 4.1 4.5 4.7 4.7 4.1 4.2 4.2
Growth in staff expenses 30 29.2 (-) Prov. Exp 1.3 1.4 1.3 1.2 1.1 0.8 0.6
Growth in other expenses 20 29.2 Adj. NII 2.8 3.1 3.4 3.5 3.1 3.4 3.7
Slippages 1.7 1.5 Treasury 0.1 -0.1 0.1 0.3 0.2 0 0
Coverage ratio 86.4 86.4 Int. Sens 2.8 3 3.6 3.7 3.2 3.4 3.7
Treasury gains/losses 0.1 0.1 Other Inc 1.9 1.9 1.8 1.9 1.7 1.7 1.7
Op. Inc 4.7 4.9 5.4 5.7 5 5.1 5.4
Opex 2.7 2.9 3.3 3.6 2.8 2.8 2.9
PBT 2 2 2 2.1 2.1 2.3 2.5
Taxes 0.6 0.6 0.6 0.7 0.7 0.7 0.8
RoA 1.4 1.4 1.4 1.4 1.5 1.6 1.7
Leverage 12.7 14 12.5 11.9 11.1 11 12
RoE 17.7 19.5 17.7 16.9 16.1 17 20.6

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