Hdfc Bank Nirma1

8/7/2019 Hdfc Bank Nirma1

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SUBMITTED TO

Institute of Management, Nirma University

AHMEDABAD

Stock Picked: HDFC BANK

College Name: Entrepreneurship Development Institute of India(EDI)

Team Name: EDI Warriors

Contact Details: Amit -9725514804, [email protected]

Gaurav-9978996965 ,[email protected]


2/19

HDFC BANK

CMP 2040

Target price 2350

Investment period 12 months

HDFC BANK:

Company background

HDFC Bank, incorporated in 1994 by HDFC Limited, is the second largest private sector bank in

India, with a balance sheet size of over Rs2.4t. Rated as one of the best banks in India, it has

1,765 branches. The bank has been consistently growing its earnings at over 30% over the past

several quarters.

Stock info:

Industry Banking

CMP 2040

Mkt. cap full(cr.) 94,614

52 weeks H/L 2518/1550

Beta 0.8

Sensex 18022

BUY


3/19

Price movement:


4/19

Retail loans grow strongly

Retail loans grew 8% QoQ and 31% YoY across segments. Auto loans (up 36% YoY and 8%

QoQ), CV and CE (up 41% YoY and 12% QoQ) and business banking loans (up 29% YoY and

9% QoQ) growth remains strong. Home loans declined 4% QoQ and grew 42% YoY on a lower

base. During the quarter, the bank did not exercise options to buy back loans from HDFC Ltd.

...driving overall loan growth

Overall loan growth was strong at 7% QoQ (on a higher base) and 38% YoY. Even after

adjusting for one-off opportunity in wholesale loans, core loan growth was 32% YoY against

19% growth for the industry. The management expects growth to be strong due to


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(1) increased focus on medium/long tenure corporate (especially infrastructure) loans,

(2) strong demand for auto loans,

(3) selective disbursement in unsecured loans like personal loans and credit cards,

(4) strong growth from rural and semi-urban areas for existing

products, and

(5) continued buy-back of home loans from HDFC Ltd to fulfill priority

sector targets.

While the management guides for over 25% loan growth, we believe loan

growth will accelerate to 30% in FY11. YTD loan growth is 23.6% against the industry

growth 6%.

Stellar performance on CASA deposits

Deposits grew 30% YoY and 7% QoQ to Rs1.95t. CASA growth was robust during the quarter

increasing by 10% QoQ. Savings deposits posted robust growth of 11% QoQ and CA deposits

grew ~9% QoQ. CASA deposits grew 31% YoY, (savings grew at a healthier 38%). CASA

performance is impressive considering the rising cost of deposits. Despite pressure on CASA

ratio (due to a rising interest rate scenario), the management expects to maintain it at over 48%

against 50% as on 2QFY11.

Margins superior at 4.2%

NIM declined by 10bp QoQ (stable YoY) from elevated levels of 4.3%, due to the rising cost of

funds. However, the fall in NIM was restricted due to strong traction in low cost deposits and

improvement in yield on loans. Despite a rise in bulk deposit rates and retail term deposits rates

(up ~100bp across maturities and expectations of another deposit rate hike in October 2010), the


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management expects to maintain margins of 4.1-4.2% in FY11. We expect margins to be stable

or decline marginally from 4.2% due to (1) strong CASA ratio, and (2) improved asset yields in a

rising interest rate scenario.

Sequential growth of 8% in fees impressive

Other income declined 9% YoY to Rs9.6b due to a loss on the sale of investments. The bank

booked a oss on the sale of investment of Rs521m in 2QFY11 against a trading gain of Rs1.63b

in 2QFY10 and Rs215m in 1QFY11. Fee income growth was strong at 8% QoQ and 16% YoY.

The management expects fee income to grow by ~18% in FY11 despite pressure on third-party

distribution fees (15% of overall fee income) as increased volume growth will compensate for an

expected decline in insurance commission.

Asset quality best in the industry

Gross NPAs increased by 3% QoQ to Rs18.4b. Gross NPA ratio was 1.16% v/s 1.21% a quarter

earlier and 1.76% a year earlier. Net NPAs were sequentially stable at 4.1%. Net NPA ratio was

0.3% v/s 0.5% in 2QFY10. Provision coverage ratio was strong at 78% (77% a quarter earlier).

From 1QFY11 the bank began to recognize floating provisions as part of tier-II capital rather

than netting up from NPA. Outstanding restructured loans at a mere 10bp of gross standard loans

also give comfort on the balance sheet quality. Lower pressure on margins and a sharp decline in

credit cost will lead to a sharp improvement in risk-adjusted margins.

Key investment arguments

Strong focus on retail loans (52% of loans) and high proportion of CASA deposits (50%of total deposits) enable superior margins of over 4%.

Gross NPAs at 1.2% and net NPAs at 0.3%, with restructured standard loans of just10bp, are among the lowest in the industry, indicating superior risk management skills.

After the rundown of the CBOP book and with a lower proportion of unsecured retailloans, credit costs are expected to come off sharply in FY11.

Core operating profitability is improving at a faster pace, with strong loan growth, stablemargins and improving operating leverage.


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DEPOSITS

Deposits HDFC (in crores) Axis (in crore)

2005-06 55796.82 40,113.53

2006-07 68297.94 58,785.60

2007-08 100768.6 87,626.22

2008-09 142811.58 117,374.11

2009-10 167404.44 141,300.22

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20000

40000

60000

80000

100000

120000

140000

160000

180000

2005-06 2006-07 2007-08 2008-09 2009-10

HDFC (in crores)

Axis (in crore)


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OPERATING PROFIT

Operating Profit HDFC (in crores) Axis (in crores)

2005-06 2,059.03 950.9

2006-07 2,059.03 1,193.09

2007-08 4,884.60 2,034.80

2008-09 8,919.75 2,999.92

2009-10 8,267.82 3,941.77

0.00

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4,000.00

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10,000.00

2005-06 2006-07 2007-08 2008-09 2009-10

HDFC (in crores)

Axis (in crores)


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LOANS & ADVANCES

Loans &Advances HDFC (in crores) Axis bank (in crores

2005-06 2,277.09 1,679.98

2006-07 3,605.48 1,892.07

2007-08 4,402.69 2,784.51

2008-09 6,356.83 3,745.15

2009-10 6,356.83 3,901.06

0.00

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3,000.00

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5,000.00

6,000.00

7,000.00

2005-06 2006-07 2007-08 2008-09 2009-10

HDFC (in crores)

Axis (in crores


10/19

Financial Ratios:

1. NET INTEREST MARGIN:

Year Net Interest

Income(in lacs)

Avg. Interest

Earning Asset (in

lacs.)

Net Interest

Margin HDFC

Bank (%)

Net Interest

Margin AXIS Bank

(%)

2005-06 230068 57517 4.0 3.14

2006-07 346848 86712 4.0 3.27

2007-08 522788 118815.45 4.4 3.77

2008-09 742116 176694.28 4.2 4.24

2009/10 838660 195037.20 4.3 3.95

Net Interest margin of HDFC Bank remains almost consistent over the years where it is also

above the industry average which is around 3.5%. Where NIM of SBI is 3.82% and it is also

consistent over the years and NIM of ICICI Bank is 4.08%. HDFC Bank has managed to keep its

0

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1.5

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2005-06 2006-07 2007-08 2008-09 2009-10

HDFC BANK

AXIS BANK


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NIM well above the other peer banks which show the good management of the bank. But if you

see the NIM of the AXIS bank over the last five year they have continuously improved from

4.08% to 5.34% which implies the better management then the HDFC Bank. We expect HDFC

Bank to further improve their NIM in coming years.

2. CAPITAL ADEQUACY RATIO

Strong Capital adequacy and branch expansion to drive CASA and Credit market share gains,

respectively The key positive from the results was the CASA deposit growth of 37.5% yoy and

8.9% quentially, driven by a 30.9% yoy growth in Current deposits and a 42.9% yoy growth in

Savings deposits. The strong traction in CASA growth is attributable to the banks aggressive

branch expansion during the year and to the increasing productivity of the branch network of

CBOP. The bank opened a substantial 313 branches and 937 ATMs during FY2010, to take its

branch network to 1,725 branches and 4,232 ATMs at the end of FY2010 (incidentally, the cost-

to-income ratio of the bank remained healthy during FY2010 at 48%).The bank plans to open

another 150 branches during FY2011E. Against this backdrop, we expect the bank to sustain a

CASA ratio in the range of 49-52%,going forward. The Banks total Capital Adequacy (as per

Basel-2 guidelines) remained strong at 17.4%, with Tier-I forming 75% of the total CAR. The

bank has sufficient CAR to grow its advances 5-8% above the industry growth over FY2010-

12E.

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HDFC Bank

AXIS Bank


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Year Tier-I Tier-II Risk

Weighted

Asset

Capital

Adequacy

Ratio HDFC

Bank (%)

Capital

Adequacy

Ratio AXIS

Bank (%)

2005-06 514991 172071 6021762 11.41 11.08

2006-07 635271 333999 7408192 13.08 11.57

2007-08 1106296 354837 10744799 13.60 13.73

2008-09 1369028 660492 12938268 15.69 13.69

2009-10 2054885 649194 15498301 17.44 15.8

Capital Adequacy ratio of the HDFC Bank improves over the years and its the way ahead of the

Basel-II norms which is 9 %. It has improved from 11.41% in 2005-06 to 17.44%. This shows

the improvement in financial strength of the bank. Whereas CAR is around 13% of the Public

sector banks and private sector bank like ICICI Bank which has CAR of 19.14%, YES Bank has

20.60%, and City bank has 18.14%.


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3. NON-PERFORMING ASSET (NPA):

00.05

0.10.15

0.20.25

0.30.35

0.4

NPA

NPA

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2005-06 2006-07 2007-08 2008-09 2009-10

HDFC Bank

AXIS Bank


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Year Non-performing Assets Ratio HDFC Bank (%) Non-performing Assets Ratio AXIS Bank (%)

2005-06 0.36 0.34

2006-07 0.43 0.38

2007-08 0.47 0.42

2008-09 0.63 0.4

2009-10 0.31 0.4

NPA of the HDFC Bank remains very low compared with its peer banks. NPA has increased

exponentially in the year 2008-09 from 0.43% to 0.63%. One reason of this was the merger of

Centurion Bank of Punjab with the HDFC Bank having NPA of 1.26% before the merger. Due to

recession, HDFC bank totally stopped the outflow of the new credit owing to increase pressure

on existing loan portfolio and also the fear of anticipated mass job losses, resulted in high NPAs

as shown in the 2009-10 NPA which came down drastically form 0.63% to 0.31%. Substantially

low NPA of the bank shows the good quality asset it has. While the Public sector bank has very

high compared to the HDFC Bank and industry average of the NPA is around 1.00%. We expect

the NPA of the HDFC Bank remain moderate as bank is very cautious in giving loans.


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4. CASA :

Year Saving

Deposits(Cr.)

Current

Deposits(Cr.)

Total

Deposits(Cr.)

CASA Ratio

(%)

2005-06 16186 14752 55797 55.44

2006-07 19585 19812 68298 57.68

2007-08 26154 28760 100769 54.49

2008-09 34915 28445 142812 44.36

2009-10 49877 37227 167404 52

As CASA is a cheaper source of fund HDFC Bank highest CASA in the banking industry.

CASA of the HDFC Bank was 55.44% in 2005-06 and had marginal declined over the last five

years. It was 52% in 2009-10. As banking customer has better investment opportunity rather than

saving in the bank so it may further decline in coming years.

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2005-06 2006-07 2007-08 2008-09 2009-10

HDFC BANK

HDFC BANK


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Valuation and view

HDFC Bank is best placed in the current environment with (1) CASA ratio of ~50% (a boon in a

rising interest rate scenario), (2) strong growth outlook of 25-30%, (3) improving operating

efficiency, and (4) lower credit costs, led by best-in-class asset quality. In our view, EPS growthwill be 30% CAGR over FY10-12 against 25% posted over FY05-10.We expect EPS to be Rs85

in FY11 and Rs111 in FY12. We expect RoE to be 17% by FY11 and 19% by FY12. We

estimate BV of Rs543 in FY11 and Rs631 in FY12. The stock trades at 4.4x FY11E BV, 3.7x

FY12E BV, 28x FY11E and 21.2x FY12E EPS. While the key operating parameters would be

the best among peers, valuations factor in all positives, in our view. We are bullish on HDFC

BANK with a target price ofRs2,350.

Sector view

In FY10 loans and deposits grew 17%. We expect loan growth of 20% in FY11 with anupward bias. Deposit growth will be calibrated with loan growth.

We factor-in 15-20bp improvement in blended margins, led by improving yield on assetsand higher CASA ratio.

Our concern over asset quality is diminishing with the improvement in economicactivity.

We prefer banks with a strong core deposit franchise, higher tier-I capital and highprovision coverage ratio.

Key risks

Sustaining current business parameters with increase competitive pressures is a key risk.


17/19

FUTURE OF BANKING INDUSTRIES AND HDFC BANK

The Indian economy is likely to continue to outperform its global counterparts in the coming

years, growing by around 8% against an average world output growth of 3.9%. Investment and

capacity expansion will be a crucial link in driving the growth. Buoyant domestic demand should

help it absorb headwinds from rising interest rates and inflation. With private capex and

infrastructure spending likely to gather ground, not only will the ongoing recovery sustain into

the coming financial years but will also translate into greater buoyancy in credit growth and

stronger growth prospects for the banking sector in general. Focus on investment in the next five

year is likely to render India an attractive market that is well positioned to take advantage of both

structural and cyclical gains while its strong domestic base is likely to limit the impact of

external stress on growth dynamics and returns.

HDFC Banks mission is to be a World Class Indian Bank, benchmarking itself againstinternational standards and best practices in terms of product offerings, technology, service

levels, risk management and audit & compliance. The objective is to continue building sound

customer franchises across distinct businesses so as to be a preferred provider of banking

services for target retail and wholesale customer segments, and to achieve a healthy growth in

profitability, consistent with the Banks risk appetite. HDFC Bank is committed to do this while


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ensuring the highest levels of ethical standards, professional integrity, corporate governance and

regulatory compliance.

The Banks business strategy emphasizes the following:

Increase its market share in Indias expanding banking and financial SBUs servicesindustry by following a disciplined growth strategy focusing on balancing quality and

volume growth while delivering high quality customer service;

Leverage its technology platform and open scalable systems to deliver more products tomore customers and to control operating costs;

Maintain high standards for asset quality through disciplined credit risk management; Develop innovative products and services that attract its targeted customers and address

inefficiencies in the Indian financial sector;

Continue to develop products and services that reduce its cost of funds; and Focus on healthy earnings growth with low volatility.

FUTURE OF HDFC BANK

HDFC bank is performing well currently. As per the analysis above, it has higher chances of

showing better and improved efficiency and performance in the coming years. Also it is very

important for the bank to be very careful with its future strategies and plans because the bank

sector is becoming very crucial and the credit outflow and rates seem to increase in the coming

years and also the new banks may enter the bank sector and it may prose threat to HDFC banks

exiting share in the market. So, in order to maintain its position, it has to consistently perform

well and improve its overall performance. Banks s non interest income and ROA is consistent

over the years but it is not showing improvement ,it is the area of concern for the bank andCASA will also decline over the year because of various investment opportunities the customer

have. HDFC Bank has grown almost 25% every year and it is expected to grow the same way as

it has grown. Its balance sheet size may not be like SBI or ICICI Bank but it has generated

wealth for the shareholders that we can see from the analysis and we expect that it will continue

to give good return to the shareholders.


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Hdfc Bank Nirma1

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