HDFC Bank Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Bank - Private

Company

HDFC Bank Ltd

Reco Price
Rs. 1141.50
Price Target (1 Year)
Rs. 1370.00
Upside
20.02%

Date

May 09, 2016
Sensex
25688.86
CNX Nifty
7866.05

Exchange

Code

NSE
HDFCBANK
BSE
500180

Strong asset quality and disciplined approach will drive the future growth.

Strong Story:
HDFC Bank will continue to generate high returns on equity, and is favorably positioned to leverage India's strong long-term economic growth prospects. The bank is able to maintain strong loan growth, averaging at about 31% annually for the past 10 years, underpinned by an expansion of its deposit base at nearly the same pace (29%). The latter allows the bank to maintain low-cost funding and uphold its profitability. As such, net interest margin averaged 4.7% over the past decade, much higher than any of its peers. Liquidity remains strong, with the bank's loan/deposit ratio at 85% as of fiscal 2016.

Reduction in Cost:
HDFC Bank maintains strong cost-control practices, with its cost/income ratio declining steadily over the past five years. The bank's scale advantage is kicking in, as it reaps benefits from investing in branches in both urban and rural areas. A digital strategy will complement the firm's targeted expansion of 200-300 branches annually. The management noted that 30% of the personal loans in fiscal 2016 originated through the online channels, with other products tracking around 20%. We anticipate that the bank's cost/income ratio will further decline as additional products are directed towards the digital channel and its branches are becoming more efficient, with a focus on cross-selling additional financial products.

Best-in-class asset quality:
Thanks to the rigorous credit parameters, the asset quality stood best-in-class and improved further with gross and net NPA ratios at 0.94% and 0.28% respectively in Q4FY2016. However, in absolute terms, gross NPA and net NPAs stood higher and surged by 28% & 47% Y-o-Y respectively; slippages for the quarter stood at Rs 170 Crores which were 1.5% as against 1.7% in Q3FY16. While agri and business banking segments did witness spikes in slippages in Q3FY16, the quarter observed pull back. The Punjab Government exposure stands at Rs 2000 Crores; also the bank utilized floating provisions to the tune of Rs 300 Crores. Restructured book has stood at just 0.1% and have remained stable past six quarters in a row. Going forward, by FY18E, the credit costs are expected to stand higher in the range of 0.6% and gross NPAs and net NPAs at 1.0% and 0.3% respectively.

Strong loan growth – both Retail assets and wholesale contributing:
Loans and advances grew at a robust 27%. As per the bank’s internal classification, the proportion of retail loans (including business banking) is 62% which grew by 28% Y-o-Y, while wholesale grew by 25% Y-o-Y, mainly on account working capital and medium term loans in Q42016. Retail loan growth was facilitated mainly due to housing loans (+32% Y-o-Y), personal loans (+45% Y-o-Y), vehicle loans (+23% Y-o-Y), credit cards (+27% Y-o-Y) and business banking (+22% Y-o-Y). Within vehicle loans, auto and 2-wheeler loans were up 23% and 26%, while the CV/CE portfolio growth picked up to 24% vs. 19% in the sequential quarter. Home loan segment too has been exceptionally strong in last three quarters. The management indicated that they are retaining a higher proportion of loans on their books. This is driven by HDFC Bank buying back a higher proportion of the housing loans it originates (70% as compared to 50% earlier) from HDFC. Management had earlier indicated that the effect of this will be seen in the form of a higher base throughout FY16, and growth rates should normalize by September 2016 to reflect the growth rate of origination (seen in FY14).

Value Creation:
We believe that there is still a considerable scope for long-term expansion and shareholder value creation, as the bank benefits from rising incomes across India's middle and upper classes, which have been its target customer segments for a long time now. The bank’s focus on salaried individuals with steadily rising incomes, and on giving loans mainly to existing clients within this segment, has allowed HDFC Bank to control its nonperforming loans at about 0.6% of the total lot for the past five years; and we see this as commendable.

Stock Data

CMP (Rs)
1141.40
Face value (Rs)
2
52 Week Range (Rs)
1136.70 - 928.00
Market cap (Rs Crores)
288800.59
Price To Book Value (x)
3.89
P/E Ratio (x)
22.56
EV/EBIDTA (x)
14.27

One Year indexed Stock Performance

HDFC Bank LtdSensex
HDFC Bank Ltd
Return (%)
1m
6m
12m
36m
Absolute
6.73
7.14
15.24
65.50
Sensex
2.66
-1.66
-6.61
28.84

Shareholders

(in %)
31-Mar
Promoter
26.43
Public
73.57
Others
0.00
Total
100

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Industry

Indian banking industry is expected to witness the roll out of innovative banking models like payments and small finance banks. 11 payment banks are expected to be launched in 2016 and 2017 apart from about 10 small finance banks. RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry. The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. Public-sector banks control nearly 80 percent of the market, thereby leaving a comparatively smaller share for its private peers. Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 12-13% in FY16 from less than 10% in the second half of CY14.

Profile

With close to Rs 8 trillion in assets and more than 4500 branches, HDFC Bank is one of India's largest non-government-owned banks. The bank's retail and wholesale segments service India's middle- and upper-income individuals and businesses. More than 60% of the bank's loans are to retail clients, within which working capital loans and vehicle financing are the most prominent (accounting for 73% of the retail book), followed by personal loans (16%) and housing loans (11%). With close to INR 8 trillion in assets and more than 4,500 branches, HDFC Bank is one of India's largest non-government-owned banks. The bank's retail and wholesale segments service India's middle- and upper-income individuals and businesses. More than 60% of the bank's loans are to retail clients, within which working capital loans and vehicle financing are the most prominent (accounting for 73% of the retail book), followed by personal loans (16%) and housing loans (11%).

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-14
Mar-15
Mar-16
Mar-17E
Mar-18E
Income:-
  • Interest Earned
  • Other IncomeM
  • Total Income
  • Growth (%)
  • Interest Expended
  • Operating Expenses
  • Total Expenditure
  • Operating Profit before Prov.& Cont.
  • Margin (%)
  • Provisions and Contingencies
  • PBT
  • Tax
  • Profit After Tax
  • Adj Calculated EPS
  • 42555.02
  • 8297.50
  • 50852.52
  • -
  • 23445.45
  • 12469.65
  • 12469.65
  • 14937.42
  • 29.37
  • 1726.75
  • 13210.67
  • 4446.16
  • 8764.51
  • 36.45
  • 50666.49
  • 9545.69
  • 60212.18
  • 18.41
  • 27288.46
  • 14577.52
  • 14577.52
  • 18346.20
  • 30.47
  • 2266.75
  • 16079.45
  • 5379.40
  • 10700.05
  • 42.64
  • 63161.57
  • 11211.65
  • 74373.22
  • 23.52
  • 34069.57
  • 17831.89
  • 17831.89
  • 22471.76
  • 30.21
  • 2960.77
  • 19510.99
  • 6693.66
  • 12817.33
  • 50.63
  • 76775.00
  • 14880.00
  • 91655.00
  • 23.24
  • 42685.00
  • 22050.00
  • 64735.00
  • 26920.00
  • 29.37
  • 3550.00
  • 23370.00
  • 8017.58
  • 15352.42
  • 60.64
  • 95504.00
  • 17250.00
  • 112754.00
  • 23.02
  • 54050.00
  • 27050.50
  • 81100.50
  • 31653.50
  • 28.07
  • 4152.00
  • 27501.50
  • 9434.97
  • 18066.53
  • 71.36
Source: Stockaxis Research, Company Data

Valuation

HDFC Bank continues to grow well in and expanding its market share while managing credit costs efficiently. Defying macro challenges, HDFC Bank continues to maintain business momentum and earnings traction each quarter; thereby improving asset quality was added advantage in Q4FY2016.

As per our estimates the Adjusted book value for FY2018E comes to Rs 392/Share. Hence, we assign a target price of Rs 1370 trading at P/ABV FY2018E of 3.49x indicating fair valuation, considering its strong asset quality and improved market share.

 

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