HDFC Bank BUY

Please refer to important disclosures at the end of this report

Market Cap Rs8321bn/US$112.1bn Year to Mar FY20 FY21 FY22E FY23E Reuters/Bloomberg HDBK.BO/HDFCB IN NII (Rs bn) 562 649 757 891 Shares Outstanding (mn) 5,524.1 Net Profit (Rs bn) 263 311 377 457 52-week Range (Rs) 1627/1002 EPS (Rs) 47.9 56.4 68.3 83.0 Free Float (%) 74.0 % Change YoY 23.7 17.9 21.1 21.4 FII (%) 40.1 P/E (x) 31.0 26.3 21.7 17.9 Daily Volume (US$'000) 1,85,860 P/BV (x) 4.8 4.0 3.5 3.0 Absolute Return 3m (%) 1.9 P/ABV (x) 4.8 4.1 3.6 3.1 Absolute Return 12m (%) 45.9 GNPA (%) 1.3 1.3 1.3 1.3 Sensex Return 3m (%) 7.6 RoA (%) 1.9 1.9 2.0 2.1 Sensex Return 12m (%) 53.1 RoE (%) 16.4 16.6 17.3 18.2

Equity Research June 25, 2021 BSE Sensex: 52699 ICICI Securities Limited is the author and distributor of this report Company update

Banking Target price: Rs1,818 Shareholding pattern

Sep '20

Dec '20

Mar '21

Promoters 26.0 26.0 26.0 Institutional investors 60.1 60.8 60.8 MFs and others 14.0 13.4 13.0 FIs/Banks 0.0 0.1 0.0 Insurance Cos. 8.5 7.8 7.7 FPI 37.6 39.5 40.1 Others 13.9 13.2 13.2

Source: BSE

Price chart

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HDFC Bank BUY Maintained Annual report analysis – Raising the bar higher; embarking on project ‘Future Ready’ Rs1,506

Demonstrating responsible leadership (theme for FY20 annual report), HDFC Bank’s FY21 annual report highlights how it is cruising ahead despite headwinds, driving aspirations of inclusive growth and catalysing the next wave of transformation. It humbly accepts technology, besides strength, also as an area of improvement and is embarking on scale changing technology adoption and transformation agenda to drive ambitious growth plan. The aim is to keep the system always ON, SECURE and PERFORM at SCALE. It has also unveiled project ‘Future Ready’ to add strength to its strategic and execution muscle. It includes: 1) Identifying growth engines (created new business segments of MSME and rural banking), 2) adding digital marketing as another key delivery channel, 3) expanding semi-urban and rural markets, 4) creating a new digital factory to foster innovation, and 5) putting in place the right talent and further strengthen its core functions to drive project ‘Future Ready’. This, coupled with superior metrics, granularisation of deposits, improving RWA profile, capital buffer (tier-1 of 17%), cost efficiency and 60bps precautionary buffer, reinforces confidence in its resilience. Maintain BUY with an unchanged target price of Rs1,818. ‘Run and Build the Bank’ of the future: The bank is building on its execution

muscle by creating future growth engines focusing on business verticals (MSME, rural banking, semi-urban/rural markets etc) and delivery channels (digital marketing along with branches and VRMs), with digital technology being the driving force. It will ‘Run and Build the Bank’ of the future with vision to make HDFC Bank the most preferred ‘un-bank’ experience for new India.

Building new competencies is a key pillar of digitisation strategy: The Bank has taken regulatory intervention on technology outage issues as an opportunity to improve and redouble its efforts to fix this problem for good. Third party audit of the Bank’s IT systems is now over and the report has been submitted to the regulator. It now awaits the decision from the RBI. It has adopted a three-dimensional approach to building new competencies through digital factory, enterprise factory and enterprise IT, and encompassing targeted efforts to gain new skills, new technologies and new ways of working. It has now embarked on a scale changing technology adoption and transformation agenda to help drive ambitious future growth plans. Specific initiatives include: Infrastructure scalability, Disaster Recovery (DR) resiliency, Security Enhancements and Enhanced Monitoring Mechanisms.

Incremental financial data points from annual report: 1) Granularisation of deposits (proportion of top 20 depositors coming down to as low as 4%), 2) top 20 borrower concentration has further inched up to 13% as growth was led by large corporate segment, 3) incremental lending is in favour of public sector entities, 4) MSME lending crosses Rs2tn mark – a part of future growth engine.

INDIA

Research Analysts:

Kunal Shah [email protected] +91 22 6637 7572 Chintan Shah [email protected] +91 22 6637 7658 Piyush Kherdikar [email protected] +91 22 6637 7465

HDFC Bank, June 25, 2021 ICICI Securities

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The year gone by… HDFC Bank concluded FY21 – a year of pandemic and business disruption – with 19% earnings growth (almost similar to past 5-year average), 1.32% GNPAs (lower than pre-pandemic levels), 0.6% restructuring, 1.7% slippage run-rate, 1.5% credit cost (including 30bps contingency buffer), 14% advance growth, and 16% deposit growth. That’s indeed commendable and what gives us further confidence in the franchise are: 1) precautionary credit reserve of 60bps still exists; 2) best-in-class deposit franchise (<4% deposit cost) supporting 4.2% NIMs; 3) beefing-up of resources (123 branches added) to boost retail growth (from 6.7% in FY21); and 4) enhancing technology capabilities to address outage issues.

Actively working towards resolving technology outage issue The Bank acknowledges and humbly accepts that technology is not only a strength but also an area for improvement. In the last couple of years, its technological capability has been questioned and it is actively working towards resolving the technology outage issues. In the last 28 months, the Bank has experienced five instances of downtime and there have been some deficiencies in compliance. However, to put things into perspective, one must ignore the big picture:

‒ Becoming a bank of this scale, size, and grown market share consistently year after year is not possible, without having a strong technology backbone.

‒ It is one of the largest transaction processing banks and have come up with cutting edge customer solutions like 10-second personal loans and digital loan against mutual funds.

‒ It has effectively rolled out Video KYC during the pandemic.

‒ DigiDemat and Trading Account were introduced in partnership with subsidiary last year.

The last technology downtime led to the RBI banning the Bank from issuing new credit cards as well as putting on hold new launches under Digital 2.0 initiative. Further, the regulator also appointed a third party audit of IT systems. This audit is now over and the report has been submitted to the regulator. It now awaits the decision from the RBI.

Also, some deficiencies in compliance regarding the selling of GPS products and consequent penal action from the regulator, makes it critical for the bank employees to realise and reiterate what culture is. It urges the employees that business objectives should be driven keeping in mind the three Cs: Culture, Conscience and Customers.

Scale changing technology adoption and transformation agenda

The Bank has taken technology outage issue as an opportunity to improve and redouble its efforts to fix this problem for good. It has now embarked on a scale changing technology adoption and transformation agenda to help drive ambitious future growth plans. The aim is to ‘Keep Systems ALWAYS ON, ALWAYS SECURE AND PERFORM at SCALE’. Specific initiatives include:


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‒ Infrastructure Scalability: It has invested heavily in the scaling up of the infrastructure to handle any potential load for the next 3-5 years and is also accelerating cloud strategy to be on the cutting edge leveraging best-in-class cloud service providers.

‒ Disaster Recovery (DR) Resiliency: it has strengthened its process of monitoring Data Centre (DC) and has shifted key applications to a new DC. It has strengthened the Disaster Recovery trials and processes so that it can bounce back faster and quicker.

‒ Security Enhancements: It has not had any security issues in the past. However, it is strengthening firewalls further and have been scanning the horizon for potential security issues and be ever prepared to face them. To enhance security threats, action plans are underway for further robustness.

‒ Monitoring Mechanisms: An enhanced application monitoring mechanism has been put in place across the board to enable the Bank to keep IT systems Always On.

While executing this Technology Transformation agenda, there will sometimes be pain and outages beyond control. But it is prepared to swallow this bitter pill. It is putting in place measures that will ensure that downtimes will not be prolonged. It will continue to invest in IT products, infrastructure, services and tools to ensure a seamless banking experience. Key initiatives like a streamlined customer experience hub, a modernised and significantly strengthened customer experience and allowing access to content across channels and devices are on the anvil.

Strategies going forward

The hallmark of its strategy is its ability to adapt and evolve without losing the core. It is building upon its stated strategy of leveraging the Branch Channel and Virtual Relationship Channel with the addition of Digital Marketing as a key channel. It has created a new business segment of Commercial (MSME) and Rural Banking to capture the next wave of growth. Besides leadership position in the payments business and retail assets business, it has added Wealth Management and Private Banking as a core focus area. All these core business areas would be supported by further strengthening foundational capability in Technology and Digital domains. Its subsidiaries will help it fulfil consumer needs for holistic financial solutions and will continue to invest in them.

Project Future Ready

To realise this strategy it has unveiled project ‘Future Ready’. Project Future Ready aims to call out clear areas of focus to further add strength to its strategic and execution muscle.

‒ Clearly identified growth engines: It has broadly classified Corporate Banking, Commercial Banking (MSME) and Rural, Government and Institutional Banking, Private Banking, Retail Assets and Payments as business verticals. These will be driven by delivery channels of Branch Banking, Tele-Sales/Service/Relationship and Digital Marketing. These growth engines will account for the bulk of future investments.

‒ Fully powered by renewed focus and vigour on Technology/Digital investments that would act as the core backbone to both ‘Run and Build the


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Bank’. While it strengthens Enterprise Technology Factory to keep systems always ‘ON’, available and secure, it is creating a new Digital Factory. The mandate of the new Digital Factory is to foster innovations in the Product and Consumer experience domain through own build or collaborate with new age fin-tech and big-tech companies. Following the core, moving to the cloud, creation of micro-services / API-based architecture, innovating through partnerships leveraging API interconnectivity all backed by a strong data / AI strategy would form the core of what it intends to pursue going forward. It is working on many new exciting opportunities to improve consumer experience and introduce new innovations like ‘Banking on the Edge’, which will be announced in due course of time.

‒ Put in place the right talent to drive project ‘Future Ready’: The underlying philosophy is to develop employees with diverse skills, multifunctional exposure with One Bank collaborative mindset to deliver on project ‘Future Ready’ and enable more opportunities for career growth.

‒ Continue to strengthen its core enabling functions of Internal Audit, Credit and Underwriting, Risk Management and Compliance/ Governance to support the growth ambitions. It firmly believes project ‘Future Ready’ will catalyse, create and capture the next wave of growth.

ESG approach

Recently, the Bank has committed to become carbon neutral by FY32. As a part of this initiative, it is looking at reducing its emissions, energy and water consumption. It will continue to incorporate and scale up the use of renewable energy in its operations. As a part of the roadmap, it will focus on offering loans for green products like electric vehicles at lower interest rates and incorporate ESG scores while making credit decisions. The Bank is also working on a framework for issuing green bonds. It has enhanced the total value of CSR support and investments across programmes under CSR brand, Parivartan that has so far impacted 85mn+ lives across more than 1,970 villages in India.

Semi-urban and rural markets (SURU) are a core element of inclusive growth

In FY21, it has considerably strengthened its relationship with CSCs by empanelling an additional 10,000 plus Business Correspondents (BCs) and has also set up 354 new branches (taking the total to 5,608 across 2,902 cities / towns) and 1,186 ATMs / CDMs. The share of semi-urban and rural outlets in the network is 50%, reflecting its continued focus on penetrating further into these markets. Key aspect of its aspirational inclusive growth strategy in semi-urban and rural markets has been the near trebling of the BC network to 15,756 from 5,541 in last one year. It has adopted a segment-specific approach like funding to agribusiness, MSMEs and dairy farmers.

Further nuances on few product segments

‒ Continues to be a leader in auto loans segment with strong presence in passenger, commercial vehicle and two-wheeler financing. After being impacted by the lockdown in first two quarters, growth revived in the third quarter and the momentum continued in the fourth. While there was a marginal uptick in ticket size in the fourth quarter, growth came largely on the back of improved distribution.


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‒ In the credit card business, the RBI, through its order dated December 2, 2020, advised the bank against sourcing new credit card customers. The Bank subsequently recalibrated its strategy and began selling more to its existing customers. Credit cards constitute about 6% of the overall book.

‒ In FY21, the Bank, on an average, originated Rs24.7bn (Rs23.5bn in FY20) of home loans every month and purchased Rs190bn (Rs241bn) as direct assignment of loans.

‒ About 80% of the incremental personal loans were to employees of top-rated corporates with reasonably high disposable income. Portfolio further improved qualitatively reflected in increase in credit scores across segments.

‒ Gained market share in corporate banking (23% YoY growth to Rs2.98trn) by focused outreach to large corporates and well-rated blue-chip PSUs. It also capitalised on the trend of large companies preferring to deal with fewer banks.

‒ With respect to emerging corporate (mid-market segment), the Bank leveraged its vast geographical reach, technology backbone, automated processes, suite of financial products and quick turnaround times to offer a differentiated service, which has resulted in new customer acquisitions as well as a higher share of the wallet from the existing customers. MSME advances grew >30% crossing Rs2trn and advances to micro enterprises constituted >30% of this.

‒ Loans against gold jewellery grew by over 33% to Rs80bn in FY21 and it rolled out the product from 225 more branches in FY21, taking the total number to 1,000 through which gold loans are distributed.

Leadership in payment

‒ The Bank is thriving hard on being the leading facilitator of cashless payments in India – reflected in its base of 36.7mn (32.1mn in FY20) debit cards, 14.9mn (14.5mn) credit cards and 2.13 (~1.79mn) acceptance points (across all form factors).

‒ Payments business has launched digital offerings such as Bharat QR Code, UPI, and SMS pay solutions. It has also pioneered products such as the SmartHub app for small merchants and DigiPos, which enables traditional PoS machines to accept digital payments

Bancassurance income grew 27% and accounts for 22% of fee income

‒ Income from bancassurance grew 27% to Rs35.7bn (accounting for 22% of fee income).

‒ Of this, commission from life insurance business grew 26% to Rs27.5bn and from general/health insurance, commissions were up 46% to Rs4bn

‒ Also, Rs4bn (compared to Rs10bn) seems to be for displaying publicity materials at branches.


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Being future ready Chart 1: Future ready strategy: stakeholders at the centre with ESG as an overarching principle

Source: Company data, I-Sec research

Chart 2: Staying ahead with smart banking

Source: Company data, I-Sec research Chart 3: Building new competencies is key pillar of digitisation strategy



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Chart 4: Payment business acts as a catalyst for cashless transactions

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(mn)

Credit card holder Merchant acceptance point


Chart 5: RoA trajectory sustaining in a narrow band…

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RoA RoE (RHS)


Chart 6: Only leading private bank to have not raised equity but still with comfortable Tier 1

11.8 13.7 13.2 12.8 13.2

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FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

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Loan profile Table 1: Loan growth led by corporate business banking and unsecured retail segment (Rs mn)

Particulars FY16 FY17 FY18 FY19 FY20 FY21 5Y

CAGR Corporate 24,35,484 27,49,439 30,18,500 39,60,529 50,84,115 61,57,818 20 Home loans 3,18,440 3,83,650 3,62,570 5,13,590 6,34,450 7,02,100 17 Auto Loans 5,01,990 6,20,520 7,64,270 8,06,750 8,39,350 8,43,920 11 Personal Loans 3,72,000 5,00,670 7,18,760 9,29,780 11,55,570 11,86,270 26 CVs/CE 1,46,880 1,92,210 2,33,910 2,87,300 2,90,450 2,79,770 14 Loan Against Securities 12,400 14,610 18,160 18,810 18,010 18,380 8 2-Wheelers 53,800 62,900 86,720 1,00,470 98,550 92,930 12 Business Banking 2,52,900 3,62,350 5,41,260 5,70,350 6,41,240 7,09,190 23 Credit Cards 2,05,200 2,59,950 3,61,150 4,66,300 5,75,750 6,46,740 26 Gold Loans 45,310 48,000 50,650 51,870 54,300 72,210 10 Kisan Gold cards 2,24,670 2,61,550 3,46,710 3,87,230 4,33,010 4,78,680 16 Others 1,07,590 1,30,250 1,40,730 1,81,130 2,03,310 2,45,670 18 Total 46,76,664 55,86,099 66,43,390 82,74,109 1,00,28,105 1,14,33,678 20

Chart 7: Corporate segments now constitutes almost 54% of the portfolio

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0%

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FY16 FY17 FY18 FY19 FY20 FY21

Corporate Home Auto / CV / 2W Unsecured LAS Business Banking KCC Others


Chart 8: MSME crossing Rs2tn mark constituting 18% of the portfolio – a new focus vertical

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Table 2: Advances to public sector now constitute more than 10% of portfolio (Rs mn)

FY17 FY18 FY19 FY20 FY21 Advances to public sector 1,57,741 1,37,708 2,16,010 6,23,354 11,99,083 Total Advances 55,45,682 65,83,331 81,94,012 99,37,029 1,13,28,366 Total Assets 86,38,401 1,06,39,343 1,24,45,407 1,53,05,113 1,74,68,705 As a % of total advances 2.8% 2.1% 2.6% 6.3% 10.6% As a % of total assets 1.8% 1.3% 1.7% 4.1% 6.9%


Chart 9: Granular deposit profile prominent; advance concentration rise due to corporate credit growth

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Resilient and best-in-class asset quality despite challenges Table 3: Despite challenging environment, GNPAs settled in similar range (Rs mn)

Particulars FY16 FY17 FY18 FY19 FY20 FY21 GNPA at the beginning 34,384 43,928 58,857 86,070 1,12,242 1,26,500 Additions during the year 57,126 71,262 1,29,590 1,43,820 1,75,631 1,60,400 Upgradations 13,771 15,194 41,636 32,520 36,046 16,016 Recoveries 14,387 17,280 28,083 39,325 42,782 27,133 Write-offs 19,424 23,859 32,658 45,804 82,545 92,891 Reductions during the year 47,582 56,333 1,02,377 1,17,648 1,61,373 1,36,040 GNPA at the end 43,928 58,857 86,070 1,12,242 1,26,500 1,50,860 Gross advances of previous FY 36,80,371 46,76,664 55,86,099 66,43,390 82,74,109 1,00,28,105


Chart 10: Credit cost includes 30bps contingency buffer

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GNPA Credit cost PCR (RHS)


Chart 11: Slippages below recent past averages is commendable

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Table 4: MSME restructuring under RBI guidelines issued in January 2019

Mar-20 Mar-21

No. of accounts restructured 27 2,82,589 Amt o/s (Rs mn) 481 33,914 Average o/s per account (Rs mn) 17.82 0.12



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Table 5: Restructuring under the Resolution Framework (as per RBI circular dated August 06, 2020) (Rs mn)

Type of Borrower

(A) Number of accounts where

resolution plan has been implemented

(B) exposure to accounts

mentioned at (A) before

implementation of the plan

(C) of (B), aggregate amount of

debt that was converted into

other securities

(D) Additional funding

sanctioned, if any

(E) Increase in provisions on

account of the implementation

of the resolution

Personal Loans 2,87,487 54,560 - - 5,456 Corporate persons 1,453 4,447 - - 445 Of which, MSMEs 64 271 - - 27 Others 47,080 6,076 - - 608 Total 3,36,020 65,084 - - 6,508


Chart 12: Improving risk profile Chart 13: Assets acquired in satisfaction of claims

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FY17 FY18 FY19 FY20 FY21

RWA as a % of total assets

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(Rs

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Non-banking assets acquired in satisfaction of claims

Table 6: Retail GNPAs have risen from 0.6% to 1%; corporate NPAs have come off

FY19 FY20 FY21

(Rs bn) Gross

Advances % of total

GNPA %

Gross Advances

% of total

GNPA %

Gross Advances

% of total

GNPA %

Priority sector 2,207 27% 47 2.13 2,583 26% 57 2.22 2,614 23% 55 2.10 Agri & allied activities 743 9% 32 4.29 823 8% 35 4.28 929 8% 34 3.67 Advances to industry eligible as PSL 336 4% 3 0.86 433 4% 4 0.92 662 6% 4 0.58

Services 833 10% 12 1.45 1,005 10% 17 1.71 697 6% 13 1.93 Personal loans 296 4% 0 0.09 322 3% 1 0.26 326 3% 3 1.04

Non-priority sector 6,067 73% 64 1.06 7,444 74% 68 0.92 8,819 77% 95 1.08 Agri & allied activities 86 1% 2 2.10 231 2% 1 0.33 205 2% 6 3.04 Industry 2,015 24% 23 1.12 2,746 27% 28 1.01 3,017 26% 23 0.76 Services 1,834 22% 18 0.99 1,901 19% 23 1.21 2,685 23% 37 1.38 Personal loans 2,132 26% 22 1.02 2,566 26% 17 0.65 2,911 25% 29 1.00

Total 8,273 100% 111 1.35 10,027 100% 126 1.25 11,433 100% 150 1.31 Agri & allied activities 829 10% 34 4.06 1,054 11% 36 3.42 1,134 10% 40 3.56 Industry 2,350 28% 25 1.08 3,179 32% 32 1.00 3,680 32% 27 0.73 Services 2,667 32% 30 1.13 2,906 29% 40 1.39 3,382 30% 50 1.49 Personal loans 2,427 29% 22 0.91 2,888 29% 18 0.61 3,237 28% 32 1.00



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Corporate investments skewed towards private segment Table 7: Corporate bond portfolio constitutes 3.4% of asset base (Rs mn)

FY17 FY18 FY19 FY20 FY21 Invt in debentures & bonds 1,94,698 3,47,873 2,86,970 2,58,012 5,86,747 Total Investments 21,44,633 24,22,002 29,05,879 39,18,267 44,37,283 Total Assets 86,38,401 1,06,39,343 1,24,45,407 1,53,05,113 1,74,68,705 As a % of total investments 9.1% 14.4% 9.9% 6.6% 13.2% As a % of total assets 2.25% 3.27% 2.31% 1.69% 3.36%


Table 8: Non SLR investment higher due to private corporates investments - amidst easy liquidity tapping debt market to raise money

Particulars (Rs mn) FY18 FY19 FY20 FY21 PSU 225 225 3,122 7,059 Fis 4,723 4,723 6,263 3,491 Banks 839 839 4,483 3,643 Private corporate 33,929 33,830 27,709 50,844 Subsidiaries / JV 3,826 3,826 3,826 3,826 Others 10,129 10,228 23,520 23,533 Provision for depreciation -259 -259 -978 -402 Total 53,414 53,414 67,946 91,994


Chart 14: Private corporates actively tapping debt market for raising resources

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Granular deposit profile with improving productivity Chart 15: Savings deposits per branch has risen significantly

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Chart 16: LCR disclosure: stable deposits one-third of retail deposits

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Chart 17: Consistently maintained excess LCR

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Table 9: Well matched ALM with gradual rise in >5 years bucket Particulars (%) Upto 3mths 3mths to 1 yr Over 1 -3 years Over 3 - 5 years Over 5 years FY21 Loans & advances 16 18 43 11 12 Investments 42 9 33 2 15 Deposits 18 13 40 1 28 Borrowings 39 16 29 6 11 Foreign currency assets 69 21 8 1 0 Foreign currency liabilities 38 30 16 2 15

FY20 Loans & advances 17 20 42 10 11

Investments 56 10 19 2 12 Deposits 20 15 37 1 26 Borrowings 55 8 13 6 18 Foreign currency assets 69 23 6 2 0 Foreign currency liabilities 47 23 12 2 16






Chart 18: 50% network presence in semi-urban and rural markets

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Income and expenditure profile Table 10: DICGC premium cost up due to deposit growth and rate increase (Rs mn)

FY17 FY18 FY19 FY20 FY21 Insurance 6,907 8,273 10,414 12,292 17,228 Total opex 1,97,033 2,26,904 2,61,194 3,06,975 3,27,226 Total opex ex employee cost 1,32,197 1,58,846 1,83,576 2,11,719 2,23,578 Total deposits 64,36,397 78,87,706 92,31,409 1,14,75,023 1,33,50,602 As a % of total opex 3.5% 3.6% 4.0% 4.0% 5.3% As a % of total opex ex employee cost 5.2% 5.2% 5.7% 5.8% 7.7% As a % of total deposits (bps) 11 10 11 11 13


Chart 19: Bancassurance income grew 27%

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Chart 20: Despite higher infrastructure and insurance expenses, cost ratios contained well

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2.0

2.5

3.0

- 5

10 15 20 25 30 35 40 45 50


(%)

(%)

Cost to Income ratio Cost to Assets ratio (RHS)



16

Table 11: Assumptions for gratuity liability Particulars (%) FY18 FY19 FY20 FY21 Discount rate 7.5 7.6 6.6 6.5 Expected return on plan assets 7.0 7.0 7.0 6.5 Salary escalation rate 8.0 8.0 7.0 7.0


Table 12: Assumptions for pension liability Particulars (%) FY18 FY19 FY20 FY21 Discount rate 7.5 7.6 6.6 6.5 Expected return on plan assets 7.0 7.0 7.0 6.5 Salary escalation rate 8.0 8.0 7.0 7.0


ESOP Table 13: ESOP granted almost equivalent to 1% of outstanding shares

Particulars FY16 FY17 FY18 FY19 FY20 FY21 Options granted 90 - 34 40 48 57 O/S shares 5,056 5,125 5,190 5,447 5,483 5,513 Options granted as a % of o/s shares 1.8 - 0.7 0.7 0.9 1.0


Table 14: Top-management’s remuneration broadly in-line with business growth Particular Designation FY18 FY19 FY20 FY21 Aditya Puri MD 96 137 189 138 Kaizad Bharucha Executive Director 43 59 86 60 Employee expense 68,057 77,618 95,257 1,03,648


Table 15: Options granted and exercised under ESOP schemes (Rs mn)

Particulars FY16 FY17 FY18 FY19 FY20 FY21 Options outstanding, beginning of year 218 257 184 151 137 143 Granted during the year 90 - 34 40 48 57 Exercised during the year 43 69 65 48 37 29 Forfeited / Lapsed during the year 7 4 2 7 5 3 Options outstanding, end of year 257 184 151 137 143 168 Options exercisable 99 113 94 81 64 64



17

Other highlights Chart 21: Contingent liability as % of assets broadly stable

62 57 50 54 54 51

30 33 40 36 37 37

4 4 5 5 5 8

-

50

100

150

0%

50%

100%


(%)

(%)

Other Aceptances etcGuarantees DerivativeFwd exchange Other claimsTaxation claims Cont. liability As a % of total assets (RHS)


Chart 22: Not much rise in complaints received in FY21

224

105

17 16 14 7

170

108

17 13 12 5 -

50

100

150

200

250

ATM

/ D

ebit

Car

ds

Cre

dit c

ards

Loan

s &

adva

nces

Inte

rnet

/Mob

ileBk

g Oth

ers

A/c

open

ing

rela

ted

Complaints received during the year (in thousands)

FY20 FY21



18

Financial summary Table 16: Profit and loss statement (Rs mn, year ending Mar 31)

FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E Net Interest Income 2,75,915 3,31,392 4,00,949 4,82,432 5,61,862 6,48,796 7,56,523 8,91,349 % Growth 23 20 21 20 16 15 17 18 Fee income 77,590 88,116 1,13,939 1,38,055 1,63,337 1,61,692 1,97,264 2,36,717 Add: Other income 29,927 34,849 38,264 38,203 69,273 90,357 91,049 96,844 Total Net Income 3,83,432 4,54,357 5,53,152 6,58,691 7,94,473 9,00,845 10,44,837 12,24,910 % Growth 22 18 22 19 21 13 16 17 Less: Operating Expenses (1,69,797) (1,97,033) (2,26,904) (2,61,194) (3,06,975) (3,27,226) (3,82,855) (4,40,283) Pre-provision operating profit 2,13,635 2,57,324 3,26,248 3,97,497 4,87,497 5,73,618 6,61,982 7,84,628 NPA Provisions (21,336) (31,453) (49,104) (63,941) (90,893) (46,716) (1,41,663) (1,53,806) Other provisions (5,920) (4,480) (10,171) (11,560) (30,531) (1,10,312) (16,844) (19,541) PBT 1,86,379 2,21,391 2,66,973 3,21,997 3,66,074 4,16,590 5,03,474 6,11,281 Less: taxes (63,417) (75,894) (92,106) (1,11,215) (1,03,498) (1,05,425) (1,26,724) (1,53,859) PAT 1,22,962 1,45,496 1,74,867 2,10,782 2,62,575 3,11,166 3,76,750 4,57,421 % Growth 20 18 20 21 25 19 21 21


Table 17: Balance sheet (Rs mn, year ending Mar 31)

FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E

Capital 5,056 5,125 5,190 5,447 5,483 5,513 5,513 5,513 Reserve & Surplus 7,21,721 8,89,498 10,57,760 14,86,617 17,04,377 20,31,695 23,24,694 26,80,430 Deposits 54,64,242 64,36,397 78,87,706 92,31,409 1,14,75,023 1,33,50,602 1,56,20,205 1,87,44,245 Borrowings 5,29,485 7,39,588 10,19,980 11,70,851 14,46,285 13,54,873 15,23,953 17,11,820 Other liabilities 3,67,951 5,67,793 6,68,707 5,51,083 6,73,944 7,26,022 7,40,542 7,55,353 Total liabilities 70,88,456 86,38,401 1,06,39,343 1,24,45,407 1,53,05,113 1,74,68,705 2,02,14,907 2,38,97,361 Cash & Bank Balances 3,89,188 4,89,521 12,29,151 8,13,476 8,66,187 11,94,704 11,34,922 12,90,572 Investment 16,38,858 21,44,633 24,22,002 29,05,879 39,18,267 44,37,283 51,02,875 58,68,307 Advances 46,45,940 55,45,682 65,83,331 81,94,012 99,37,029 1,13,28,366 1,33,61,939 1,60,29,674 Fixed Assets 33,432 36,267 36,072 40,300 44,319 49,093 53,740 58,013 Other Assets 3,81,038 4,22,298 3,68,787 4,91,740 5,39,311 4,59,259 5,61,429 6,50,796 Total Assets 70,88,456 86,38,401 1,06,39,343 1,24,45,407 1,53,05,113 1,74,68,705 2,02,14,907 2,38,97,361 % Growth 20.0 21.9 23.2 17.0 23.0 14.1 15.7 18.2


Table 18: Du-pont analysis (%, year ending Mar 31)


Interest income 9.3 8.8 8.3 8.6 8.3 7.4 7.4 7.3 Interest expense (5.0) (4.6) (4.2) (4.4) (4.2) (3.4) (3.4) (3.3) NII 4.2 4.2 4.2 4.2 4.0 4.0 4.0 4.0 Other income 0.5 0.4 0.4 0.3 0.5 0.6 0.5 0.4 Fee income 1.2 1.1 1.2 1.2 1.2 1.0 1.0 1.1 Total income 5.9 5.8 5.7 5.7 5.7 5.5 5.5 5.6 Operating expenses (2.6) (2.5) (2.4) (2.3) (2.2) (2.0) (2.0) (2.0) Operating profit 3.3 3.3 3.4 3.4 3.5 3.5 3.5 3.6 NPA provision (0.3) (0.4) (0.5) (0.6) (0.7) (0.3) (0.8) (0.7) Total provisions (0.4) (0.5) (0.6) (0.7) (0.9) (1.0) (0.8) (0.8) PBT 2.9 2.8 2.8 2.8 2.6 2.5 2.7 2.8 Tax (1.0) (1.0) (1.0) (1.0) (0.7) (0.6) (0.7) (0.7) PAT 1.9 1.9 1.8 1.8 1.9 1.9 2.0 2.1



19

Table 19: Key ratios (Year ending Mar 31)


Per share data EPS – Diluted (Rs) 24 28 34 39 48 56 68 83

% Growth 19 17 19 15 24 18 21 21 DPS (Rs) 4.8 5.5 3.2 7.5 9.1 10.7 13.0 15.8 Book Value per share (BVPS) (Rs) 144 175 205 274 312 370 423 487 % Growth 16 21 17 34 14 19 14 15 Adjusted BVPS (Rs) 142 172 202 270 307 363 416 479 % Growth 16 21 17 34 14 18 15 15

Valuations Price / Earnings (x) 61.1 52.3 44.1 38.4 31.0 26.3 21.7 17.9

Price / Book (x) 10.3 8.5 7.3 5.4 4.8 4.0 3.5 3.0 Price / Adjusted BV (x) 10.5 8.6 7.4 5.5 4.8 4.1 3.6 3.1

Asset Quality Gross NPA (Rs mn) 43,928 58,857 86,070 1,12,242 1,26,500 1,50,860 1,80,224 2,17,838

Gross NPA (%) 0.9 1.1 1.3 1.4 1.3 1.3 1.3 1.3 Net NPA (Rs mn) 13,204 18,440 26,010 32,145 35,424 50,424 50,424 57,424 Net NPA (%) 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 NPA Coverage ratio (%) 70 69 70 71 72 67 72 74 Gross Slippages (%) 1.6 1.5 2.3 2.2 2.1 1.9 1.7 1.7 Credit Cost (%) 0.7 0.7 1.0 1.0 1.3 1.5 1.3 1.2 Net NPL/Net worth 1.8 2.1 2.4 2.2 2.1 2.5 2.2 2.1

Business ratios (%) RoAA 1.9 1.9 1.8 1.8 1.9 1.9 2.0 2.1

RoAE 18.3 17.9 17.9 16.5 16.4 16.6 17.3 18.2 Credit Growth 27.1 19.4 18.7 24.5 21.3 14.0 18.0 20.0 Deposits Growth 21.2 17.8 22.5 17.0 24.3 16.3 17.0 20.0 CASA 43.2 48.0 43.5 42.4 42.2 46.1 48.0 49.5 Credit / Deposit Ratio 85.0 86.2 83.5 88.8 86.6 84.9 85.5 85.5 Cost-Income ratio 44.3 43.4 41.0 39.7 38.6 36.3 36.6 35.9 Operating Cost / Avg. Assets 2.6 2.5 2.4 2.3 2.2 2.0 2.0 2.0 Fee Income / Avg Assets 1.2 1.1 1.2 1.2 1.2 1.0 1.0 1.1

Earnings ratios Yield on Advances 10.8 10.2 10.3 10.5 10.1 8.9 9.0 8.7

Yield on Earning Assets 9.9 9.3 8.7 8.9 8.6 7.6 7.6 7.5 Cost of Deposits 5.9 5.3 4.6 4.8 4.9 3.9 3.6 3.4 Cost of Funds 6.0 5.5 4.9 5.2 5.0 4.1 4.0 3.8 NIM 4.5 4.5 4.4 4.4 4.2 4.1 4.1 4.2

Capital Adequacy (%)

RWA (Rs bn) 5,298 6,400 7,574 9,445 11,517 12,998 15,312 18,077

Core Tier-I 15.5 14.6 16.7 18.5 17.6 16.9 16.3 15.7 Source: Company data, I-Sec research


20

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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HDFC Bank BUY

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