INSTITUTIONAL EQUITIES IndiaNivesh Securities Limited Research Analyst SEBI Registration No. INH000000511 Please refer to important disclosure at the end October 21, 2019 INSTITUTIONAL EQUITIES Q2FY20 RESULT UPDATE | BANKING AND FINANCIAL SERVICES HDFC Bank Corporate loans compensate for retail slowdown, core earnings healthy despite minor miss HDFC Bank missed our NII estimate (-4%) despite a beat on business growth (+2.5%) as the NIM print was weaker (-10bps QoQ) due to excess liquidity (LCR 133%). The beat on other income was dominated by treasury profit, given the negative base, although fee traction stayed steady and healthy. Balance sheet momentum was robust, with corporate loans (+32%YoY) compensating for the sharp slowdown in retail loans (14.5%YoY). A continued and unrelenting focus on term deposits delivered a strong overall deposit growth rate (22.5%YoY). The management commentary, as usual, reflected business optimism, tempered only by obvious red herrings in selective retail and an acknowledgement of competitive intensity, while stating that the competition remained rational on pricing and growth. We retain the ‘BUY’ rating on HDFC Bank with a target price of Rs1,500 valuing the sector leader 4.2x FY21E ABV. Auto slowdown affects retail growth, bounce back expected: Vehicle loans, comprising ~27% of the bank’s retail loan book, declined 1.5% YoY even as the non-vehicle retail segments registered ~19% YoY growth (Exhibit 3, pp.3), restricting the retail loan growth to 14% YoY (based on internal classification). The management expects a bounce in CV loans going forward. This was made up by corporate lending opportunities, which a) were spread across industries, b) had large but not necessarily chunky exposures, and c) included sectors like power, telecom, and NBFCs, with top-rated entities. For now, HDFC Bank has demonstrated that its growth momentum won’t be constrained by a slowdown in its retail segment. Management not worried by marginal NIM weakness, balance sheet robustness at core of business strategy: The bank was ahead of its peers in raising TD rates and aggressively beginning to book term deposits starting Q4FY18. The strategy continued in Q2FY20 even as CASA ratio declined, although marginally, to 39.3% (down from the post-demonetisation peak of 48%). The bank is not worried about marginal/adverse NIM movements and continues to strong focus on liquidity. A strong LCR of 133% contributed to the overall NIM decline of 10bps QoQ. A softer LCR or 115% would not have affected NIM as much. Adjusted for this negative carry, NII was robust and in line. Quality of incremental business good, indicators assuring stable asset quality: The bank’s observed asset quality indicators across geographies and income spectrums were showing improvement, and the quality of incremental growth was good and ‘well selected’. The NPA ratios improved with slippages trending lower than estimates. Overall, the commentary on asset quality is an assuring, especially in retail. Valuation: Our target price includes Rs65/share value attributable to HDB Financial Services and HDFC Securities Ltd. (ad-hoc based on FY19 earnings). We rate HDFC Bank’s banking business at 4x FY21E P/ABV, taking the target price to Rs1,500. Maintain ‘BUY’. Refer pp. 4 for conference call takeaways. Financial summary Rs mn FY17 FY18 FY19 FY20E FY21E Net interest income 331,392 400,949 482,432 560,424 661,472 Growth (%) 20.1 21.0 20.3 16.2 18.0 Net profit 145,496 174,867 210,781 264,452 337,910 Growth (%) 18.3 20.2 20.5 25.5 27.8 ROE (%) 17.9 17.9 16.5 16.5 18.2 ROA (%) 1.9 1.8 1.8 2.0 2.1 ABV (Rs) 171.0 201.4 269.5 304.9 356.6 EPS (Rs) 28.4 33.7 38.7 48.3 61.8 P/E (x) 43.3 36.5 31.8 25.4 19.9 P/ABV (x) 7.2 6.1 4.6 4.0 3.4 Source: Company, IndiaNivesh Institutional Research STOCK INFO BSE 500180 NSE HDFCBANK Bloomberg HDFCB IN Reuters HDBK.NS Face Value (Rs) 1 Equity Capital (Rs mn) 5,470 Mkt Cap (Rs mn) 6,723,296 52wk High/Low 1,285 / 940 Avg Daily Vol (BSE+NSE) 8,940,948 SHAREHOLDING PATTERN (%) Promoters 26.21 Public 73.79 (as on Sept, 2019) PRICE PERFORMANCE STOCK PERFORMANCE 3m 6m 12m HDFCB IN Equity 2.2 7.4 24.8 SENSEX 1.0 0.4 13.0 Source: Bloomberg, IndiaNivesh Institutional Research Ravikant Bhat +91 22 6240 6474 [email protected]Prithvish Uppal +91 22 6240 6453 [email protected]BUY CURRENT PRICE (INR) 1,229 UPSIDE/DOWNSIDE ▲21.2% TARGET PRICE (INR) 1,500 PREVIOUS TARGET (INR) 1,300 (CMP as on 18 July 2019 closing)
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Q2FY20 RESULT UPDATE | BANKING AND FINANCIAL SERVICES HDFC …€¦ · and HDFC Securities Ltd. (ad-hoc based on FY19 earnings). We rate HDFC Bank’s 3mbanking business at 4x FY21E
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INSTITUTIONAL
EQUITIES
IndiaNivesh Securities Limited Research Analyst SEBI Registration No. INH000000511 Please refer to important disclosure at the end
October 21, 2019
INSTITUTIONAL EQUITIES
Q2FY20 RESULT UPDATE | BANKING AND FINANCIAL SERVICES
HDFC Bank Corporate loans compensate for retail slowdown, core earnings healthy despite minor miss
HDFC Bank missed our NII estimate (-4%) despite a beat on business growth (+2.5%) as the NIM print was weaker (-10bps QoQ) due to excess liquidity (LCR 133%). The beat on other income was dominated by treasury profit, given the negative base, although fee traction stayed steady and healthy. Balance sheet momentum was robust, with corporate loans (+32%YoY) compensating for the sharp slowdown in retail loans (14.5%YoY). A continued and unrelenting focus on term deposits delivered a strong overall deposit growth rate (22.5%YoY). The management commentary, as usual, reflected business optimism, tempered only by obvious red herrings in selective retail and an acknowledgement of competitive intensity, while stating that the competition remained rational on pricing and growth. We retain the ‘BUY’ rating on HDFC Bank with a target price of Rs1,500 valuing the sector leader 4.2x FY21E ABV.
Auto slowdown affects retail growth, bounce back expected: Vehicle loans, comprising ~27% of the bank’s retail loan book, declined 1.5% YoY even as the non-vehicle retail segments registered ~19% YoY growth (Exhibit 3, pp.3), restricting the retail loan growth to 14% YoY (based on internal classification). The management expects a bounce in CV loans going forward. This was made up by corporate lending opportunities, which a) were spread across industries, b) had large but not necessarily chunky exposures, and c) included sectors like power, telecom, and NBFCs, with top-rated entities. For now, HDFC Bank has demonstrated that its growth momentum won’t be constrained by a slowdown in its retail segment.
Management not worried by marginal NIM weakness, balance sheet robustness at core of business strategy: The bank was ahead of its peers in raising TD rates and aggressively beginning to book term deposits starting Q4FY18. The strategy continued in Q2FY20 even as CASA ratio declined, although marginally, to 39.3% (down from the post-demonetisation peak of 48%). The bank is not worried about marginal/adverse NIM movements and continues to strong focus on liquidity. A strong LCR of 133% contributed to the overall NIM decline of 10bps QoQ. A softer LCR or 115% would not have affected NIM as much. Adjusted for this negative carry, NII was robust and in line.
Quality of incremental business good, indicators assuring stable asset quality: The bank’s observed asset quality indicators across geographies and income spectrums were showing improvement, and the quality of incremental growth was good and ‘well selected’. The NPA ratios improved with slippages trending lower than estimates. Overall, the commentary on asset quality is an assuring, especially in retail.
Valuation: Our target price includes Rs65/share value attributable to HDB Financial Services and HDFC Securities Ltd. (ad-hoc based on FY19 earnings). We rate HDFC Bank’s banking business at 4x FY21E P/ABV, taking the target price to Rs1,500. Maintain ‘BUY’.
Source: Company, IndiaNivesh Institutional Research
HDFC Bank
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Exhibit 5: HDFCB has moved in a 1-yr forward PABV band of 3.2x-3.9x in trailing 2-years…
Source: Company, IndiaNivesh Institutional Research
Exhibit 6: …and 1-year forward PE band of 20.4-26.7x in trailing 2-years
Source: Company, IndiaNivesh Institutional Research
3.00
3.20
3.40
3.60
3.80
4.00
Oct
-17
Dec
-17
Feb
-18
Ap
r-1
8
Jun
-18
Au
g-1
8
Oct
-18
Dec
-18
Feb
-19
Ap
r-19
Jun
-19
Au
g-1
9
Oct
-19
1-yr forward rolling P/BV
20.00
21.00
22.00
23.00
24.00
25.00
26.00
27.00
Oct
-17
Dec
-17
Feb
-18
Ap
r-1
8
Jun
-18
Au
g-1
8
Oct
-18
Dec
-18
Feb
-19
Ap
r-1
9
Jun
-19
Au
g-1
9
Oct
-19
1-yr forward rolling P/E
HDFC Bank
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Conference call takeaways Growth opportunities – non retail portfolio: Seeing healthy pipeline in business
banking with rising penetration in semi-urban and rural channels, digital offerings complementing growth.
Disbursal growth in auto: Reasonably strong in Q2FY20, hoping the festival quarter would provide an even better impetus.
External benchmarking and home loans: Continue to have robust home loan originations, don’t see price being a disadvantage, and believe customers willing to pay a premium for the HDFC home loan product.
Growth opportunities – non retail portfolio: Corporate loan opportunities across industries, not dependent on chunky transactions, although bank did originate some large exposures, selective exposures taken to top rated entities in power, NBFC, and telecom.
Deposit growth / LCR / NIMs: Content with having excess liquidity, believe it is necessary, and okay if it results in temporary NIM weakness. LCR during Q2FY20 at 133% (vs. regulatory minimum of 100%) impacted NIMs (-10bps QoQ), NIMs would have been stable with a desired 115% LCR.
Fee growth: No one-offs in fees, monetised available gains in treasury to book strong trading profits (Rs4.1bn, refer Exhibit 1, pp. 2). Payments business, better than past yields in bancassurance contributed to the fee robustness.
Opex, branch additions: Shall continue to add branches / people even as digital rollout / penetration continues to get dense
Asset quality trends – unsecured portfolio: Delinquency levels in personal loan portfolio fairly stable, early indicators on newer portfolio (not to be read as new) measured months back, trending better, similar experience across other portfolios.
Asset quality trends – secured loans: Single largest component—auto loans—exhibit fairly stable early indicators, HDFCB trends far better than industry currently.
Asset quality trends – general indicators: Orientation towards origination from better income borrowers although bank extends finance across bureau bands, remain cautious about individual leverage, income, and stability of income.
Asset quality trends – 20F disclosures on auto loans: Spike in FY19 auto loan delinquency on account of a couple of problematic relationships, classified as NPAs, contributed to auto loan NPA spike to 1.43% from 90bps, but for this, auto loans were stable.
Other Assets 541,122 502,360 491,740 632,683 755,929
Total Assets 8,638,402 10,639,343 12,445,407 14,565,105 17,451,537
Source: Company, IndiaNivesh Institutional Research
HDFC Bank
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Key Ratios (standalone)
Y / E March FY17 FY18 FY19 FY20E FY21E
Earning Per Share (Rs) 28.4 33.7 38.7 48.3 61.8
Book Value Per Share (Rs) 174.6 204.8 273.9 312.3 364.8
Adj Book Value Per Share (Rs) 171.0 201.4 269.5 304.9 356.6
P/E (x) 43.3 36.5 31.8 25.4 19.9
P/BV (x) 7.0 6.0 4.5 3.9 3.4
P/ABV (x) 7.2 6.1 4.6 4.0 3.4
Balance Sheet Ratios (%)
CAR 14.6 14.8 17.1 17.3 16.1
Tier I 12.8 13.3 15.8 15.9 15.5
-CET1 12.8 12.3 14.9 15.2 14.9
Leverage (TA / Networth) 9.7 10.0 8.3 8.5 8.7
Credit/Deposit 86.2 83.5 88.8 87.0 86.2
CASA 45.8 45.5 42.1 40.7 39.3
Growth Y-o-Y (%)
Net Advances 19.4 18.7 24.5 19.5 19.7
Deposits 17.8 22.5 17.0 21.9 20.9
Business 18.5 20.8 20.4 21.4 20.3
Net Interest Income 20.1 21.0 20.3 16.2 18.0
Other Income 14.4 23.8 15.8 22.6 18.0
Net Profit 18.3 20.2 20.5 25.5 27.8
Return Ratios (%)
ROA 1.9 1.8 1.8 2.0 2.1
ROE 17.9 17.9 16.5 16.5 18.2
RoRWA 2.5 2.4 2.4 2.6 2.9
Yield / Margin (%)
Yield on Funds 8.8 8.3 8.6 8.6 8.7
Cost of Funds 4.6 4.2 4.4 4.5 4.6
Interest Spread 4.2 4.2 4.2 4.1 4.1
Core spreads 4.9 5.8 5.5 5.3 5.2
Net Interest Margin 4.8 4.8 4.7 4.5 4.5
Cost / Income 43.4 41.0 39.7 39.2 38.9
Other Ratios (%)
Gross NPA 1.1 1.3 1.4 1.4 1.4
Net NPA 0.3 0.3 0.3 0.4 0.4
PCR 68.7 79.3 78.4 70.5 72.4
Source: Company, IndiaNivesh Institutional Research
RoA Tree (standalone) (%) FY17 FY18 FY19 FY20E FY21E
Interest Earned 8.8 8.3 8.6 8.6 8.7
Interest Expended 4.6 4.2 4.4 4.5 4.6
Net Interest Income 4.2 4.2 4.2 4.1 4.1
Other Income 1.6 1.6 1.5 1.6 1.6
Net Income 5.8 5.7 5.7 5.7 5.7
Total Income 10.4 9.9 10.1 10.2 10.3
Total Expenses 2.5 2.4 2.3 2.3 2.2
Pre Provision Profit 3.3 3.4 3.4 3.5 3.5
Provisions 0.5 0.6 0.7 0.8 0.7
Profit before tax 2.8 2.8 2.8 2.7 2.8
Tax 1.0 1.0 1.0 0.8 0.7
Profit after tax 1.9 1.8 1.8 2.0 2.1
Source: Company, IndiaNivesh Institutional Research
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IndiaNivesh Securities Limited
Research Analyst SEBI Registration No. INH000000511