May 25, 2009 | Banking
Initiating Coverage
Current Price Rs 1366 Potential upside 6%
HDFC Bank (HDFBAN) Stable & consistent delivery of quality…
HOLD
Source: Company, ICICIdirect.com Research
FY10E
FY11E
Bloomberg Code Reuters Code Face value (Rs) Promoters Holding Market Cap (Rs cr) 52 week H/L Sensex Average volumes
HDFCB IN HDBK.BO 10 19% 57937 1540 / 774 13886 1538386
Comparative return metrics (%) Stock Returns Axis Bank HDFC Bank Kotak bank Yes Bank
3m 87 55 162 134
6m 79 67 127 101
12m -16 -3 -12 -21
Price Trend 1900 1600 1300 1000
Close Price
Absolute Buy
Absolute Sell
Target Price
ICICIdirect | Equity Research
1 | Page
Apr-09
Feb-09
Mar-09
700 Jan-09
FY11E 3497.0 82.4 24.5 16.6 3.1 3.3 2.5 0.9 1.5 19.4
FY09
Oct-08
Exhibit 1: Key Financials
10416
Stock Metrics
Sep-08
At the CMP of Rs 1366 the bank is trading at 3.1x and 2.9x its FY10E and FY11E ABV, respectively. We expect HDFC Bank to be able to generate RoEs in the range of 15-16% over the next two years. After considering three possible scenarios of capital raising via warrants conversion (Exhibits 31 to 33), we value the bank at original conversion price of Rs 1520. Thereby, we have arrived at FY11E fair ABV of Rs 478. We value the stock at 3.0x FY11E ABV to arrive at a target price of Rs 1434. We recommend a HOLD rating on the stock.
9074
2000
Aug-08
Valuations
FY10E 2809.1 66.2 25.1 20.7 3.4 3.7 2.7 1.1 1.4 17.6
7499
5228
7000
Jul-08
Historically, HDFC Bank has managed to garner CASA of above 50% but the ratio has now moderated to 44% in FY09 due to the merger. We believe the underleveraged branches of CBoP will shore up to HDFC Bank’s level from FY10E. Hence, we expect CASA mobilisation to start inching up again and reach 48% by FY11E. This will help the bank to maintain NIMs of over 4% in the coming years as well.
FY09 2245.0 52.9 17.8 25.9 3.9 4.2 2.0 0.6 1.3 17.0
12000
FY08
Liability franchise (CASA) to provide shelter to maintain NIMs
FY08 1590.2 44.9 25.5 30.5 4.2 4.3 1.4 0.5 1.4 17.7
NII trend
Dec-08
We expect the merged entity to grow its advance book by 21% CAGR to Rs 145757 crore and deposit by 19% to Rs 202282 crore by FY11E. The merger has helped HDFC Bank gain market share, which is nearly 4% now. We believe HDFC Bank will retain its market share, going ahead as well. The growth in advances should lead to NII growth of 18% CAGR over FY09-FY11E to Rs 10416 crore. This, in turn, should lead to a PAT growth of 25% CAGR to Rs 3497 crore by FY11E.
Kajal Jain
[email protected] Chirag Shah
[email protected] Viraj Gandhi
[email protected] Nov-08
Business momentum moderating – Aims growth coupled with profitability
Analysts’ Name
(Rs Crore)
HDFC Bank has historically traded at premium multiples due to its strong deposit franchise, stable earnings growth, reputed management and high RoE. However, the challenging economic environment will moderate growth momentum and pose challenges, going ahead. We expect the balance sheet to grow at 17% CAGR over FY09-FY11E to Rs 2,52,921 crore. We are initiating coverage on the stock with a HOLD rating.
Year to March Net Profit (Rs crore) EPS (Rs) Growth (%) P/E (x) Price / Book (x) Price / ABV (x) GNPA (%) NNPA (%) RoNA (%) RoE (%)
Target Price Rs 1434 Time Frame 12 months
Company Background HDFC Bank, a new-generation bank, is the second largest privatesector bank, which received a banking licence in 1994. Housing Development Finance Corporation (HDFC) promoted the bank to capitalise on the opportunity provided by the Reserve Bank of India (RBI) as it opened up the banking industry to private players.
Shareholder Promoters Institutional investors Other investors General public
% holding 19.4 39.6 8.8 32.3
Promoter & Institutional holding trend (%)
Exhibit 2: Expansion in distribution platform
50
FY09
3295
1412
40
761
FY07
684
FY06
1977 1605
19.4
19.4
19.4
Q1
1000
2000
3000
Branches
4000
Q2
Promoter Holding
5000
ATM
Exhibit 3: Historical growth in business 90
73
(%)
70
30
34 38 37
58
51
47 51 50 39
36
44
53 37 47
41 29
27
48 34 22
20
42 27
42
48
35
10 FY01
FY02
FY03
FY04
Advances
FY05
Deposits
FY06
FY07
FY08
FY09
Total Business
Source: Company, ICICIdirect.com Research
Key financial highlights for FY09 -
Total income grew by 58.2% to Rs 19623 crore
-
Net revenues (NII + other income) growth of 42.6% to Rs 10712 crore
-
NIM (reported) @ 4.2%, CASA @ 44.4%
-
Net profit grew 41.2% to Rs 2245 crore
-
Balance sheet size stood at Rs183271 crore
-
Deposits Rs 142812 crore, advances Rs 100239 crore
-
CAR @ 15.7%, Tier I @ 10.6%
-
GNPA @ 2.0%, NNPA @ 0.6%
Q3
Institutional Holding
Source: Company, ICICIdirect.com Research
50
19.4
10
1184
0
39.6
30 20
1323
535
FY05 256
(%)
FY08
38.0
36.6
33.6
2 | Page
Q4
Investment Rationale HDFC Bank added 660 branches in FY09 to take its tally to 1421 branches from 761 in FY08. This will help the bank to grow its deposits base by 19% CAGR over FY09FY11E
Business momentum moderating – Aims at growth coupled with profitability Market share: On the up move The merger with Centurion bank of Punjab (CBoP) has enabled the bank to enjoy higher market share. HDFC Bank had 2.3% market share in FY06 of the total credit outstanding in the system for scheduled commercial banks, which improved gradually to 2.7% in FY08. This went up to 4% by the end of June 2008 (first merged results). Similarly, the share of deposits went up from 2.6% in FY06 to 4.0%. We expect the merged entity to grow its advance book by 21% CAGR to Rs 145757 crore and deposit by 19% CAGR to Rs 202282 crore by FY11E. The expanded distribution network of 1421 branches will support these growth projections, going ahead. Exhibit 4: Market share on the rise
5 4.0
4
(%)
3.2 2.7
3
2.3 90858
2.6 2.4 115243
4.0
4.0
227715
3.8
4.0
3.8
3.8
241601
245554
243068
160,000
(Rs crore)
240,000
164196
The merger has enabled HDFC Bank to capture higher market share even in tough conditions
80,000
2 FY06
FY07
FY08
Q1FY09
Q2FY09
Q3FY09
Deposits
Advances
Total Business (RHS)
FY09
Source: Company, ICICIdirect.com Research
In an industry where all other major players like BoI and PNB are either consolidating or inching up their market share slowly, HDFC Bank is actually strengthening its position in the industry mainly due to the merger. Exhibit 5: Market share in advances
Exhibit 6: Market share in deposits 40.0
(%)
30.0
20.0
5.1
5.1
5.2
5.3
4.2
3.8
3.9
3.8
5.1
5.2
5.3
5.4
17.7
18.9
19.6
20.0
FY09
FY10E
5.1
4.4 2.4 5.0
4.8 2.7 5.1
4.8
17.5
17.7
18.5
FY07
FY08
4.0
10.0
30.0
(%)
40.0
20.0
4.7
5.0
4.9
3.9
4.0
3.7
3.8
5.3
5.4
5.4
5.2
5.3
17.1
18.0
18.2
19.4
19.7
FY09
FY10E
4.6 2.6
4.7 3.2
4.9
4.8
4.0
5.4
5.2
16.8
16.8
FY07
FY08
10.0 Q1FY09 Q2FY09 Q3FY09
SBI
PNB
HDFC Bank
BOI
Source: Company, ICICIdirect.com Research Growth assumption for FY10E
SBI
Q1FY09 Q2FY09 Q3FY09
PNB
HDFC Bank
Source: Company, ICICIdirect.com Research
Deposit-17%, advances-18%
Market share calculated only for scheduled commercial banks.
3 | Page
BOI
Liability franchise (CASA) to provide shelter to maintain NIMs Low cost deposits (CASA) will prove important, going ahead, for the bank to maintain NIMs of above 4% levels. The deposits for HDFC Bank grew at a CAGR of 37% for FY06-09. Deposits are always in the range of 70-75% as percentage of total liabilities for the bank over the years. This shows great dependence on liability franchise for growth. Hence, higher CASA mobilisation will always be on the top of the agenda for this bank in FY10E. Exhibit 7: Deposit mobilisation momentum continues
FY06
Deposits
FY07
100768
91235
68297
73506
55796
30 17.8
17.2
40
(%)
202282
214717
168228
22.4
142812
125000
133176
24.1
183271
(Rs crore)
41.7
175000
25000
37.6
252922
47.5
225000
75000
50
46.0
275000
20
20.2
17.8
10
FY08
FY09
Deposit growth (RHS)
FY10E
T.Liabilities
FY11E
T. liab growth (RHS)
Source: Company, ICICIdirect.com Research
CASA accumulation was the strongest point for HDFC Bank historically. It has maintained its CASA ratio of over 50% for years. The merger of CBoP and the rising interest scenario in H1FY09 resulted in a deceleration in CASA from over 50% to 40% by December 2008 and inching back again to 44% by March 2009. The economic scenario is now changing rapidly and interest rates are heading southwards again due to falling inflation. This will reduce the mounting gap between term deposits and saving deposits. Inflation for the week ended April 24 2009 was 0.6% against a peak of 13% odd earlier in August 2008. Therefore, this should help in garnering CASA for the coming year. We expect CASA of 48% for FY11E.
CASA trending downwards is a cause for worry. However, we believe this phenomenon will be short lived and the bank will again inch up the CASA level in FY10E and expect it to be 48% for FY11E
Exhibit 8: Deposit mix 230000
CASA %
205000 180000 155000
(Rs Crore)
104956
130000
90433
105000 80000
72136
5000
87523
45850
55000 30000
74917
89231
28765
43697 28445 54.5 26929 44.9 26123 44.0 24258 40.0 44.0
35896
46.2
26154
31853
32794
33081
34915
41898
FY08
Q1FY09
Q2FY09
Q3FY09
FY09
FY10E
Saving
Current
48.1 53629 FY11E
Term
Source: Company, ICICIdirect.com Research
4 | Page
Reasons behind maintaining high CASA ratio for HDFC Bank There is no single big contributor to CASA for HDFC Bank. Hence, this gives consistency and lower risk, going ahead
• Diversified branch network: Almost 60% of the combined branches are located in the CASA rich northern and western regions of the country • HDFC Bank mops up substantial free float generated by its transactional banking service like cash management, stock exchange clearing, plays the role of a banker to many IPOs, collecting banker to many mutual fund schemes, correspondent banking service, salary accounts and tax collections Exhibit 9: Branch distribution CBoP
HDFC Bank
Combined
8%
16%
18% 28%
34% 42%
34%
28%
22% 16%
32%
East
South West
North
28%
Source: Company, ICICIdirect.com Research
Lower risk in CASA mobilisation, going ahead The well-diversified resource mobilisation scatters the risk and mitigates the impact of any one segment suffering on the overall CASA pie. However, in the near term, integration of CBoP will lead to a lowering of CASA, as most of the branches of CBoP are underutilised. This, coupled with an increase in demand for term deposits, has pulled down the CASA in FY09. The banking sector, as a whole, has substantially increased the rates on deposits in H1FY09. This, in turn, has affected the CASA generating capacity as well as the margins of the bank across the sector. However, we believe a bank like HDFC Bank will stand out as it has always maintained a leadership position in CASA accretion. This was quite evident from the FY09 results where HDFC Bank reported a healthy CASA of 44% (consolidated figure), which is still very competitive in the industry.
Though CASA is trending downwards post merger, HDFC Bank is still the leader in the industry
Exhibit 10: CASA mobilisation: Trending down but still competitive 60
(%)
40
38
54 48
48
50 40
58
55
47
46
35
44
43
40
39 33 32
31 31
30 31
30 20 FY06
FY07
Axis bank
BOB
FY08
BOI
HDFC bank
FY09
SBI
Source: Company, ICICIdirect.com Research
5 | Page
Going forward: Further CASA generation from erstwhile CBOP branches We believe there is a substantial opportunity for HDFC Bank to create value by shoring up the underleveraged CBoP branches. We expect these branches to scale up the operations by FY10E. Before merger, CBoP branches garnered only 20% of the CASA garnered by HDFC Bank. However, the merged entity reported CASA of 44% for FY09. Going ahead, we feel the bank will be able to create value by accumulating more CASA from erstwhile CBoP branches, thus keep a check on cost of funds, and maintain NIMs (reported) above 4%. Exhibit 11: CASA per branch: Scope for improvement 100.0
(Rs Crore) .
80.0
60.0
40.0
Substantial scope for improvement
20.0 FY06
FY07
HDFC Bank
FY08A
CBoP
Source: Company, ICICIdirect.com Research
6 | Page
Net Interest Income (NII) to grow at modest 15% CAGR over FY09-FY11E We believe the well-balanced approach between the corporate and the retail book coupled with the acquisition of CBoP will help the bank to witness consistent growth in the net interest income. We have forecast moderate 18% CAGR in NII over FY09-FY11E at Rs 10416 crore supported by advances and deposits growth of 19% and 21% CAGR, respectively. The ability to garner high CASA will help the bank to control its cost of funds and, thereby, help the bank in maintaining NIMs (reported) of over 4%. Margins to be maintained around 4% The bank has reduced its deposits rate by almost 150 bps in the recent past and BPLR by just 50 bps. Lately, due to the high interest rate scenario demand for term deposits was on the rise, which could have influenced NIMs for the bank. However, we believe a higher CASA ratio coupled with deposit rate cuts should help in maintaining NIMs (calculated) above 4%, going ahead, as well. This will still be higher than the industry average of 3%. Exhibit 12: NIMs (calculated) maintained above 4% 12 9.5
10
9.4
9.1
7.5
(%)
8
9.4
8.5
6
6.1
5.3
4.7
5.6
5.4
4.7
4.6
FY10E
FY11E
3.7 4
4.9
4.5
2 FY06
FY07
4.3
FY08
Yield on Advances
FY09
Cost of Funds
NIMs (calculated)
Source: Company, ICICIdirect.com Research
Exhibit 13: NII trending northwards
10,416
11,000
(Rs Crore)
9,074 9,000
7,421
7,000
5,228
5,000 3,000 1,042
1,163
1,438
1,723
1,642
1,867
1,979
1,000 Q1FY08 Q2FY08 Q3FY08 Q4FY08
FY08
Q1FY09 Q2FY09 Q3FY09
FY09
FY10E
FY11E
Source: Company, ICICIdirect.com Research
7 | Page
Non-interest income: One of the key drivers of profitability We expect non-interest income to grow at a moderate pace of 16% CAGR over FY09-FY11E to Rs 4393 crore. The main driver for non-interest income for HDFC Bank is commission and brokerage (CEB) income i.e. fee based income that the bank generates from the distribution of third-party products like mutual funds and insurance, fees on debit/credit cards, transactional charges, processing fees of retail assets, cards and trade products and from originating home loans for HDFC. The other arm, which contributes to other income, is profit on sale/revaluation of investment and foreign exchange and derivatives revenue. The non-interest income grew @36% CAGR over FY06-09 fuelled by CEB growth of 33%for the same period. We expect the growth to moderate in the coming years. We have modelled in modest 20% CAGR growth in CEB over FY09-FY11E to Rs 3539 crore.
(Rs Crore) .
Exhibit 14: Contribution of CEB to non-interest income 20% CAGR
5000 4500 4000 3500 3000 2500 2000 1500 1000 500
4393 3797
30% CAGR
3291
605
651
1045 1124
FY05
FY06
1516
2949
2457
2283 1292
3539
1715
FY07
FY08
FY09
FY10E
Commission, Exchange, Brokerage
FY11E
Total
Source: Company, ICICIdirect.com Research
We expect some moderation in third-party distribution of mutual funds and insurance products due to the slowdown in financial markets. So, we have modelled in 20% CAGR over FY09-FY11E. Exhibit 15: Third-party distribution of MF
Exhibit 16: Third-party distribution of insurance
45000
700
33000
Mutual Funds
Insurance
500
21000
380
(Rs crores) 10000
20000
FY06
.
30000
FY07
40000
FY08
Source: Company, ICICIdirect.com Research
50000
(Rs crores) 100
200
300
FY06
400
FY07
.
500
600
FY08
Source: Company, ICICIdirect.com Research
8 | Page
700
800
The merger of CBoP augurs well for HDFC Bank for the distribution business since the merger provides HDFC Bank with an expanded distribution network and around 3 million additional customers. The remittance business is also expected to pick up since around 114 branches of CBoP are located in Kerala and Tamil Nadu where the remittance business is comparatively high. The bank originates home loans under its arrangement with HDFC with monthly origination crossing Rs 550 crore by the end of March 2008. We expect lower origination growth for FY10E due to the slump in the retail sector to around Rs 600 crore on a monthly basis. The bank earns 1% as the origination fee on the amount of origination for such arrangements. The bank also has the right to exercise its option to take any part of 70% of the loan origination into its books. The bank has not exercised this option anytime in the previous years. Exhibit 17: Cash settlement volumes on Indian bourses
Exhibit 18: Cash management volumes
40000
30000
30000 25000
38000
25000
36000
(Rs Crore) .
(Rs Crore) .
35000 30000
20000 15000 10000
15000 10000 5000
5000
25000
20000
10000
12500
0
0 FY06
FY07
Source: Company, ICICIdirect.com Research
FY08
FY06
FY07
FY08
Source: Company, ICICIdirect.com Research
HDFC Bank is one of the largest players in the cash management and settlement business on stock and commodities exchanges in India. This coupled with strong growth in the transaction banking vertical and welldiversified fee income supports well when there is some kind of moderation in financial activities. However, we believe HDFC Bank is performing well on all fronts like its multiple delivery channels, proper positioning and cross selling of products across the retail and corporate segments. The business verticals of CBoP will also add to the non-interest income.
9 | Page
Asset quality to stabilise next year Exhibit 19: A blip in asset quality post merger 3
2.7
2.5
2.5 1.9
(%)
2 1.5
1.2
1.2
1.3
1.6
1.5
1.1
1 0.5
0.4
0.4
0.4
FY06
FY07
FY08
2.0
0.5
0.6
0.6
0.6
Q1FY09
Q2FY09
Q3FY09
FY09
0.9
Asset quality of HDFC Bank is deteriorating because of the merger. CBoP had a big exposure to the auto sector and mortgage portfolio. We, therefore, have factored in higher NPA for FY10E but prudent provisioning norms will keep a check from FY11E onwards
0
GNPA
FY10E
FY11E
NNPA
Source: Company, ICICIdirect.com Research
The asset quality of the bank is under pressure because of the CBoP merger, since the asset quality of CBoP was not as healthy as compared to HDFC Bank. The reported figures for GNPA were 2.0% during FY09. On the other hand, due to rising interest rates there was an upward pressure on NPA levels across the industry. On an immediate basis, stressed retail loan book may cause higher NPLs. Of these retail assets, personal loan and credit cards form only 13% of the total advance book. We feel NNPA should stabilise in the range of 1.0-1.1% by the end of FY11E since loan loss provisioning for HDFC Bank is always in the range of 70-75% for HDFC Bank. Total restructured assets as of March 31, 2009 were Rs 120 crore of which Rs 69 crore were already classified as NPAs
Exhibit 20: Retail loan book for FY09
others, 12% Auto (Including TW, CV), 42%
Business Banking, 22% Loan against Sec, 2%
Credit cards, 7%
Personal, 15%
Source: Company, ICICIdirect.com Research
In addition, applications received for loan restructuring which were yet to be approved or implemented amounted to Rs 305 crore, of which Rs 254 crore was classified as NPAs. Total standard assets which have been restructured or where restructuring is under consideration were therefore, 0.1% of the bank’s gross advances as of March 31, 2009
10 | Page
Merger with CBoP: Value accretive in the long run “Growth coupled with quality: Adhering to its philosophy, HDFC Bank went on to acquire Centurion Bank of Punjab (CBoP) thereby creating the seventh largest banking entity in India in terms of balance sheet size. The deal was a share swap deal wherein 29 shares of CBoP fetched one share of HDFC Bank. The deal amount and valuation offered took many by surprise. In short, the deal was EPS accretive in FY09 but will definitely be value accretive from FY10E due to network expansion.
The merger was EPS dilutive in FY09 but is expected to be EPS accretive from FY10E onwards
Modalities of the merger: The price paid… Nearly seven crore shares of HDFC Bank were allotted pursuant to a share swap ratio of (1:29). This translated to one equity share of HDFC Bank of Rs 10 each for every 29 shares of CBoP of Re 1 each, as on June 16 2008. Thus, HDFC Bank paid a sum of Rs 8050 crore to acquire CBoP, thereby valuing the latter at 4.1x its 9MFY08 BV. Exhibit 21: Valuation matrix 7.0 1151.0 8043.6 1963.3 4.1
No of shares (crore) Closing price of HDFC Bank (16/06/2008) Amount paid (crores) Book Value (Rs crores) No of times book value (x) Source: Company, ICICIdirect.com Research
Exhibit 22: Dynamics : Business per branch 250 200
238
Value creation
216 1+1 > 2
172
168
150 112 100 60 50 0 Business/ branch of HDFC Bank
Business/ Branch of CBoP FY07
FY08
FY09
Expected business/branch of the merged enitity FY10E
Source: Company, ICICIdirect.com Research
Branch valuation Exhibit 23: Branch valuation No of shares (crores) Closing price as on 16/06/08 Amount paid (Rs crores) No of Branches Acquisition cost per branch (Rs crores) Market Cap/branch of HDFC Bank (Rs crores)
7.0 1151.0 8043.6 394.0 20.4 53.5
Source: Company, ICICIdirect.com Research
11 | Page
The amalgamation added significant value to HDFC Bank in terms of increased branch network, geographic reach and customer base and a bigger pool of skilled work force, which would have taken a few years to grow organically. This will help the bank to garner more retail deposits and thus reduce upward pressure on the cost of funds, which will be the key in challenging times ahead. The swap ratio turned out to be more positive for HDFC Bank than expected. As we see it, it seems that HDFC Bank has paid higher to acquire 394 branches of CBoP. However, when we look at the acquisition cost per branch as compared to what the market is valuing each HDFC branch at, it accounted for only 38% of its value then. However, in our view all the under leveraged branches of CBoP will shore up to HDFC Bank’s standard in FY10E. Hence, the merger will be EPS accretive in FY10E. Until then it will be dilutive. Exhibit 24: Merged entity with a much wider reach 4200 3177
3200
3295
2890 2526 1977
2200 1229 1200
684
1605
1412 1412 1412
761 316
324
444
528
527
528
200 Branches
2007
ATM
2008
Q1FY09 (Post Merger)
Cities
Q2FY09
Q3FY09
FY09
Source: Company, ICICIdirect.com Research
CBoP had 20% of total assets compared to the size of HDFC Bank by the end of December 2007, despite having 52% of the branches (394). The business per branch was only 40% on a comparative basis for CBoP. However, in the first merged results, we can see that business per branch is closer to HDFC Bank’s level, which is where we see value creation. This was the trend in the next two quarters as well. Exhibit 25: Merger dynamics Rs Crore Parameters Advances Deposits Total Assets Branches Business/branch NIM (%) CASA (%)
HDFC Bank Q3FY08 71387 99387 131439 754 226 4.3 50.9
CBoP CBoP as % of Q3FY08 HDFC Bk 15083 21.1 20710 20.8 25404 20.0 394 52.3 91 40.1 3.6 24.5 -
Q1FY09 96797 130918 168598 1221 186 4.1 44.9
Merged Results Q2FY09 Q3FY09 107820 100682 133781 144862 171765 183185 1412 1412 171 174 4.2 4.3 44.0 40.0
Q4FY09 100239 142812 183271 1412 172 4.2 44.0
Source: Company, ICICIdirect.com Research
12 | Page
Risks & Concerns Economic slowdown can affect growth and asset quality RBI has shifted its focus from curbing inflation to economic stability and growth. Inflation, which was around 12-13% at the beginning of CY08 is now again in the low single digits. Despite recent rate cuts, we do not see a faster credit off take, particularly private banks. Banks are hesitant to lend to certain sectors where stress is visible like real estate, gems & jewellery, exports, autos, textiles, etc. If the slowdown continues, the estimated business growth may fall for system and for HDFC Bank as well. In the slowing economic scenario, we can see some up tick in NPA levels across the industry. Retail as a percentage of total advances for HDFC Bank is around 60%. This segment can suffer if we witness a further slowdown in growth and earnings.
Excessive dilution to drag RoE Post 2008, shareholders of CBoP were allotted 6.98 crore shares based on swap ratio resulting in dilution of almost 20%. If we consider the conversion of warrants, already allotted to HDFC in FY10 then there will be further dilution of 6% from these levels. Any further dilution, going ahead, for capital requirement may affect the RoEs adversely.
Risk of premium multiple shrinking Inability to maintain higher than industry CASA and deliver consistent profits in future as delivered in the past may result in shrinking of premium multiple received by the bank.
13 | Page
Financials Total net income growth pegged at 15% CAGR over FY09-FY11E Net Interest Income (NII) and non-interest income has grown at 46% and 36% CAGR over FY07-09 period taking total income growth at same level. Going ahead, with pressure on advances growth and falling interest rates we anticipate NII to grow at 18% CAGR over FY09-11E to Rs 10416 crore. However, lower treasury gains and fee income will result in moderate 16% CAGR growth in non-interest income leading to total net income growth of 18% CAGR over the same period to Rs 14083 crore. We have seen that more than 55% of the revenues came from traditional banking transaction that is interest income. CEB (fee income) as a percentage of total income is picking up momentum. On the expense side, operating expense contributed only at 32% of the total expenses, which shows cost efficiencies built in the system for the bank. However, after the merger of CBoP we have factored in that the operating cost will rise for the merged entity in the coming years. Exhibit 26: Rupee earned for FY08
Exhibit 27: Rupee spent for FY08
Profit on Investment, 2%
Tax, 6%
CEB, 14%
Provision, 13%
Interest Expense, 42%
Forex, 3%
Dividend, 3% Trans to Reserve, 5%
Int from advances, 56%
Interest from Investment, 23%
Operating Expense, 32%
Other int income, 2%
Source: Company, ICICIdirect.com Research
Source: Company, ICICIdirect.com Research
Profitability moderating We revised PAT @25% CAGR during the next couple of years slightly moderating from historical trend of 30%. The bank has reported a CAGR of 38% in PAT for FY99-08. This shows the consistency with which the bank has made inroads into the under banked economy of India. We expect provisions to rise steeply by 66% in FY09E due to CBOP merger and its old NPAs. We expect the bank’s prudent growth norms to keep provisioning under control and, hence, bring bottomline growth back on track. Exhibit 28: PAT growth: to moderate in the coming year
(Rs Crore)
4000
3497 2809
3000
2245
CAGR @44%
2000 1000
82
120
210
297
387
FY99
FY00
FY01
FY02
FY03
509
665
870
FY04
FY05
FY06
1141
1590
0 FY07
FY08
FY09 FY10E FY11E
Source: Company, ICICIdirect.com Research
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Payout ratio The EPS for the bank has been on the rise right from FY98 when the bank reported EPS of Rs 4.1. By the end of FY08, it went all the way to Rs 46.2. The growth for the bank was always steady and the payout ratio for the bank has always been in the range of 20-25%. We feel dividend payout ratio will stay at current levels to keep a balance between growth and returns to shareholders.
90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
30
77.6 62.3
22.9 24.0 22.9 4.5
22.6
46.2 36.3
22.2
27.9
8.5
7.0
5.5
25
52.8 23.9
12.6
20.9
20.9
13.0
16.2
20
(%)
(Rupees)
.
Exhibit 29: Movement in EPS, DPS & payout ratio
15 10
FY05
FY06
FY07
EPS
FY08
DPS
FY09
FY10E
FY11E
Payout ratio (RHS)
Source: Company, ICICIdirect.com Research
Return on assets consistently above 1% HDFC Bank has been maintaining return on assets around 1.3-1.4% for the past three years. However, because of the merger with CBoP we have seen the RoA coming down to 1.2% for FY09. However, as synergies creep into the system, we believe it will again pick up to 1.4% for FY10E and improve further to 1.5% in FY11E. Exhibit 30: RoA: To pick up post FY09E 2
(%)
1.5
1.4
1.3
1.3
1
1.4
1.5
1.2
Once Synergies creep in by shoring up branches
Because of merger of CBoP
0.5
0 FY06
FY07
FY08
FY09
FY10E
FY11E
Source: Company, ICICIdirect.com Research
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Valuations HDFC Bank has been historically registering a growth of more than 30% in its bottomline. The bank has been maintaining higher than industry average NIMs (reported) at above 4%. The major reason is a well-diversified loan book coupled with the ability to maintain and sustain higher than average CASA deposits (near 50%). Also, with adequate multiple distribution channels and effective cross selling of products the bank has been able to gain traction on the fee income side. These factors, along with its able management have enabled the bank to command a premium multiple, as it has always traded at 3x-3.5x on a rolling one-year forward P/ABV multiple. At the CMP of Rs 1366, the bank is trading at 3.1x and 2.9x its FY10E and FY11E ABV, respectively. We expect HDFC Bank to be able to generate RoEs in the range of 15-16% over the next two years. After considering three possible scenarios of capital raising via warrants conversion (Exhibits 31-33), we value the bank at a conversion price of Rs1510. Thereby, we have arrived at FY11E fair ABV of Rs 478. We value the stock at 3.0x FY11E ABV to arrive at a target price of Rs 1434. We recommend HOLD on the stock Alternative scenario I Exhibit 31: If conversion of warrants takes place @ Rs 1520 as stipulated Basic EPS Diluted EPS Book value per share Normal ABVPS P/PPP P/E P/BV P/ABV DPS
FY2008 44.9 44.9 324.4 316.0 13.2 31.2 4.3 4.4 8.0
FY2009 52.9 52.9 351.1 327.3 11.5 26.5 4.0 4.3 12.6
FY2010E 62.3 62.3 467.2 438.6 9.5 22.5 3.0 3.2 13.0
FY2011E 77.6 77.6 509.1 478.7 8.0 18.0 2.7 2.9 16.2
Source: Company, ICICIdirect.com Research
Alternative scenario II Exhibit 32: If conversion of warrants takes place @ Rs 1100/share instead of Rs 1520 Basic EPS Diluted EPS Book value per share Normal ABVPS P/PPP P/E P/BV P/ABV DPS
FY2008 44.9 44.9 324.4 316.0 12.9 30.5 4.2 4.3 8.0
FY2009 52.9 52.9 351.1 327.3 11.2 25.9 3.9 4.2 12.6
FY2010E 62.3 62.3 442.2 413.6 9.3 22.0 3.1 3.3 13.0
FY2011E 77.6 77.6 484.1 453.7 7.8 17.7 2.8 3.0 16.2
Source: Company, ICICIdirect.com Research
Our drawing of the alternative scenarios I, II and III hinges on the weak capital markets that may lead to either the lapse of conversion warrants or a repricing of the same.
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Alternative scenario III Exhibit 33: If HDFC denies conversion of warrants in FY10E FY2008 44.9 44.9 324.4 316.0 12.9 30.5 4.2 4.3 8.0
Basic EPS Diluted EPS Book value per share Normal ABVPS P/PPP P/E P/BV P/ABV DPS
FY2009 52.9 52.9 351.1 327.3 11.2 25.9 3.9 4.2 12.6
FY2010E 66.2 66.2 401.4 371.0 8.8 20.7 3.4 3.7 13.8
FY2011E 82.4 82.4 445.9 413.7 7.4 16.6 3.1 3.3 17.2
Source: Company, ICICIdirect.com Research
Exhibit 34: Peer set comparison
HDFC Bank Axis Bank Yes Bank BOI
P/E (x) 25.9 14.9 12.8 5.6
FY09 P/ABV (x) 4.2 2.7 2.4 1.5
ROE(%) 10.5 19.1 20.7 24.5
P/E (x) 22.0 12.9 10.3 5.1
FY10E P/ABV (x) 3.1 2.4 1.9 1.2
ROE(%) 15.6 18.9 20.3 22.3
P/E (x) 17.7 10.9 8.6 4.4
FY11E P/ABV (x) 2.9 2.0 1.6 1.0
Source: ICICIdirect.com Research
Exhibit 35: RoE decomposition (%) Net interest income/ Avg. assets Non-interest income/ Avg. assets Net total income/ Avg. assets Operating expenses/ Avg. assets Operating profit/ Avg. assets Provisions/ Avg. assets Return on Avg. assets Leverage (Avg assets/ Avg equity) (x) Return on equity
FY08 4.7 2.0 6.7 3.3 3.4 1.3 1.4 12.5 17.7
FY09 4.3 1.7 6.0 3.5 2.5 1.2 1.3 12.0 17.0
FY10E 4.6 1.9 6.5 3.2 3.4 1.3 1.4 12.4 17.6
FY11E 4.5 1.9 6.4 3.0 3.4 1.2 1.5 12.8 19.4
Source: ICICIdirect.com Research
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ROE(%) 15.9 19.1 20.4 21.4
Exhibit 36: Financial performance Profit and Loss Account FY08 10115.0 4887.1 5227.9 50.7 2283.2 7511.0 1301.4 2444.3 3765.4 1484.8 2280.6 690.5 1590.2 39.3
FY09 16332.3 8911.1 7421.2 42.0 3290.6 10711.8 2055.6 3477.2 5179.0 1879.7 3299.3 1054.3 2245.0 41.2
FY10E 18001.2 8927.3 9073.9 22.3 3796.7 12870.6 2480.7 3751.3 6638.6 2537.7 4100.9 1291.8 2809.1 25.1
Rs. Crore FY11E 20496.0 10080.2 10415.8 14.8 4392.5 14808.3 2721.4 4201.7 7885.3 2780.2 5105.1 1608.1 3497.0 24.5
FY08
FY09
FY10E
Rs. Crore FY11E
Liabilities Capital Reserves and Surplus Networth Deposits Borrowings Subordinated Debt Other Liabilities & Provisions Total
354 11143 11497 100769 4479 3249 13183 133177
425 14486 14911 142736 6885 5227 13769 183527
425 16621 17045 168228 5990 5427 15145 211835
425 18509 18934 202282 6238 5927 16659 250040
Assets Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total
1175 49394 63427 4403 14778 133177
1558 65661 100256 3031 13022 183527
1714 76481 119916 1532 12192 211835
1751 85116 145757 3076 14340 250040
Interest Earned Interest Expended Net Interest Income Growth (%) Non Interest Income Net Income Employee cost Other operating Exp. Operating Income Provisions PBT Taxes Net Profit Growth (%) Balance Sheet
Source: Company, ICICIdirect.com Research
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Exhibit 37: Ratios FY08
FY09
FY10E
FY11E
35.4 44.9 324.4 316.0 30.5 4.2 4.3 0.6 8.0
42.5 52.9 351.1 327.3 25.9 3.9 4.2 0.9 12.6
42.5 66.2 401.4 371.0 20.7 3.4 3.7 1.0 13.8
42.5 82.4 445.9 413.7 16.6 3.1 3.3 1.3 17.2
Yields & Margins (%) Yield on avg int earning assets Avg. cost on funds Net Interest Margins (calculated) Avg. Cost of Deposits Yield on average advances
9.5 5.3 4.9 5.2 12.6
9.8 5.9 4.4 5.7 12.3
9.3 5.3 4.7 5.2 11.8
9.1 5.1 4.6 5.0 11.3
Profitabilty (%) Interest expense / total avg. assets Interest income/ total avg. assets Non-interest income/ avg. assets Non-interest income/ Net income Net-interest income/ Net income Cost / Total net income
4.4 9.0 2.0 30.4 69.6 49.9
5.6 10.3 1.7 30.7 69.3 55.1
4.5 9.1 1.9 29.5 70.5 48.4
4.4 8.9 1.9 29.7 70.3 46.8
Quality and Efficiency Credit/Deposit ratio GNPA (%) NNPA (%) RONW (%) ROA (%)
62.9 1.4 0.5 17.7 1.4
70.2 2.4 1.0 17.0 1.3
71.3 2.7 1.1 17.6 1.4
72.1 2.5 0.9 19.4 1.5
Valuation No. of Equity Shares EPS (Rs.) BV (Rs.) BV-ADJ (Rs.) P/E P/BV P/adj.BV Div. Yield (%) DPS (Rs.)
Source: Company, ICICIdirect.com Research
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Glossary Cash reserve ratio (CRR): Every scheduled commercial bank was required to maintain with the RBI every fortnight a minimum average daily cash reserve equivalent of 5% of its net demand and time liabilities (NDTL) outstanding as on the Friday of the previous week. Current account savings account (CASA): It is the proportion of current account and savings account deposits in total deposits. Net interest margin (NIM) – It is the ratio of banks net interest income to its interest earning assets. It basically depicts bank’s net interest earning capability from the assets deployed. Held-to-Maturity (HTM) – Investments that the bank intends to hold till maturity. Available for Sale (AFS) - Investments that are available for sale anytime after 90 days from the date of purchase. Capital Adequacy Ratio (CAR) – Capital adequacy is determined as a ratio of capital funds to total risk weighted assets of the bank. Currently, the minimum CAR to be maintained is 9%. Non-performing assets (NPA) – These are advances where the principal and interest is not paid by borrower for 90 days. Net NPA = Gross NPA – Provisions CAGR – Compounded annual growth rate Net interest income (NII) –Total interest income less total interest expense Adjusted book value (ABV) – Book value per share less NNPA Dividend per share (DPS) – Dividend declared pr share
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RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Outperformer, Performer, Hold, and Underperformer. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Outperformer (OP): 20% or more; Performer (P): Between 10% and 20%; Hold (H): +10% return; Underperformer (U): -10% or more; Pankaj Pandey
Head – Research
[email protected] ICICIdirect.com Research Desk, ICICI Securities Limited, Gr. Floor, Mafatlal House, 163, HT Parekh Marg, Backbay Reclamation Churchgate, Mumbai – 400 020
[email protected] ANALYST CERTIFICATION We /I, Kajal Jain CA Chirag Shah PGDBM (Finance) Viraj Gandhi MBA (CM) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
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