Bajaj Capital Centre for Investment Research

Vol. 10/11-12 September 10, 2011

Buy HDFC BANK

Analyst: Phone: Email: Anand Rawani +91 11 66161111 Ext: 580 anandr@bajajcapital.com

CMP: Rs 483.7 Upside potential: 11.6%

Target: Rs 540/Horizon: 6-8 months

HDFC Bank has shown strong performance over the years and grown above industry growth rate. Despite rising interest rates NIM is likely to remain stable due to high CASA ratio at above 52%. NII is likely to grow at a CAGR of 21.7% between FY11 and FY13. Asset quality remained intact. Further expansion is likely to help it continue its growth momentum.

Head of Research: E-mail:

Alok Agarwala aloka@bajajcapital.com

Investment rationale
Strong core performance: HDFC Bank has demonstrated strong core performance during the past reflecting impeccable management competence. In terms of three year CAGR, NII grew at 26.3% to Rs 10,543.1 cr. NII is expected to grow at a CAGR of 21.7% between FY11 and FY13E. NIM has improved marginally in FY11 over FY10 and is likely to sustain at these levels. Bottom line is estimated to grow at 23.3% and 26.2% to Rs 4,840.7 and Rs 6,108.5 cr in FY12E and FY13E, respectively, with a positive bias. Asset quality intact: Asset quality of the bank remained sound. Gross and net NPAs came at Rs 1694.3 cr and Rs 296.4 cr in FY11. In percentage terms, they stood at 1.05% and 0.19%, respectively. CAR of the bank was at 16.2% with tier 1 CAR at 12.2%. Over the next two years, NPA ratios are expected to improve. Provision coverage ratio stood at 82.5% in FY11 as against 78.4% in FY10. We have modeled a PCR of 82% over the next two years. Rising market share: HDFC Bank has been continuously grabbing market share both in deposits and advances. By the end of FY11, its share in the total industry deposits and advances stood at 3.9% and 4.13%. In FY11, advances and deposits of the bank grew by 27.1% and 24.6% as against industry growth of 21.6% and 17.3%, respectively. We expect HDFC Bank to continue to outperform industry growth going ahead. High CASA proportion to help keep NIM intact: The bank enjoys very high CASA deposit proportion at 52.7% in the overall deposits. In a rising interest rate high CASA acts as cushion against margin erosion. We expect CASA % to remain more or less at this level over the next few years helping it to keep its NIM intact. Valuation: It is trading at a price of 473.3, which translates into trailing price to book value of 4.2. In terms of price to adjusted book value, it is available at 4.5x, 3.9x and 3.4x times its adjusted book value of FY11, FY12E and FY13E, respectively. Its current ROE is 16.7% and is likely to improve over the next couple of years. We give a 'Buy' recommendation on the stock with a target price of Rs 540 and an investment horizon of 6-8 months. Summery of financials & valuations

Key Data (Consolidated) Sector Face value (Rs.) 52-week high/low (Rs.) Market cap (Rs. cr.) Book value (Rs.) Price / book value PE ratio (TTM) Dividend (%) Average daily volume (1 Y) Beta 1 year return (%)

Bank 2.0 519 / 396.3 113135.9 114 4.3 26.9 165 1143.7 cr 1.1 5.5

Shareholding pattern

Figures as on June 30, 2011

Stock performance

Particulars
Advances Deposits NII NIM (%) PAT Book value Adj. BV P / ABV

FY09A
98883.0 142811.6 7421.2 4.85 2244.9 68.9 65.9 3.0

FY10A
125830.6 167404.4 8386.4 4.26 2948.7 94.0 92.3 4.2

FY11A
159982.7 208586.4 10543.1 4.40 3926.4 109.1 107.8 4.5

FY12E
194078.2 253734.9 12836.8 4.40 4840.7 124.7 123.2 3.9

FY13E
237000.5 309793.1 15627.1 4.42 6108.5 145.0 143.2 3.4

Source: BCCIR, Company data, Figures in Rs cr.

Key Investment arguments

Strong core performance: HDFC Bank has demonstrated strong core performance during the past reflecting impeccable management competence. In terms of three year CAGR, NII grew at 26.3% to Rs 10,543.1 cr. During the same period, interest income grew by 25.4% to Rs 19,928.2 cr. In terms of YoY growth, interest income and net interest income grew by 23.3% and 25.7% in FY11. Going ahead, NII growth is likely to remain strong. We expect NII to grow at a CAGR of 21.7% between FY11 and FY13E. NIM has improved marginally in FY11 over FY10 and is likely to sustain at these level. PAT grew by 33.2% to Rs 3,926.4 cr in FY11 on YoY basis. Bottom line is estimated to grow at 23.3% and 26.2% to Rs 4,840.7 and Rs 6,108.5 cr in FY12E and FY13E, respectively, with a positive bias. Rising market share: HDFC Bank has been continuously grabbing market share both in deposits and advances. By the end of FY11, its share in the total industry deposit stood at 3.9% as against 3.67% in FY10. Its market share in FY10 declined a bit as it grew below the industry growth rate. However, if one looks a long term trend the graph is northward marching. On the advance side, its market share stood at 4.13% in FY11 as against 3.95% in FY10. The rise in market share can be attributed to outperforming industry growth rate continuously. In FY11, advances and deposits of the bank grew by 27.1% and 24.6% as against industry growth of 21.6% and 17.3%, respectively. We expect HDFC Bank to continue to outperform industry growth going ahead. Asset quality intact: Asset quality of the bank remained sound. Gross and net NPAs came at Rs 1694.3 cr and Rs 296.4 cr in FY11. In percentage terms, they stood at 1.05% and 0.19%, respectively. Capital adequacy ratio of the bank was at 16.2% much above the regulatory requirement of 9%. Tier 1 CAR stood at 12.2%. Provision coverage ratio stood at 82.5% in FY11 as against 78.4% in FY10. Over the next two years, NPA ratios are expected to improve. We have discounted a PCR of 82% in our model. Robust branch expansion: The bank has been expanding its branch network aggressively. This helped it grow above industry growth rate. Branch network has expanded from 535 in FY06 to 1986 in FY11. Sudden upward move in FY09 is due to acquisition of CBoP. During the last year it added 261 branches. Branch network
3000 2000 1000 0 FY06A
Source: Company data

1,412 535 684 761

1,725

1,986

FY07A

FY08A

FY09A

FY10A

FY11A

High CASA proportion to help keep NIM intact: The bank enjoys very high CASA deposit proportion at 52.7% in the overall deposits. Its not just in this year but HDFC Bank has been able to keep its CASA proportion higher during the past as well. In a rising interest rate high CASA acts as cushion against margin erosion. We expect CASA % to remain more or less at this level over the next few years helping it to keep its NIM intact. CASA proportion in total deposits
80% 60% 40% 20% 0% FY06A
Source: Company data

55.4%

57.7%

54.5% 44.4%

52.0%

52.7%

52.0%

52.0%

FY07A

FY08A

FY09A

FY10A

FY11A

FY12E

FY13E

Concerns
Slowdown in economy: Indian economy has shown signs of slow down. Economic slowdown is likely to impact the overall credit growth in the banking system. Being part of the same industry, HDFC Bank will also be affected if the economy slows down significantly.

Financials and business metrics

Credit deposit mix: Total business of the bank grew at a three year CAGR of 31% to Rs 368,569 cr in FY11. The growth remained robust at 25.7% in FY11 on YoY basis. Deposits and advances stood at Rs 208,586 cr and Rs 159,983 cr, respectively in FY11. The C/D went up to 76.7% in FY11 from 75.2% in the previous year. Business mix of the bank (Figures in Rs cr)
600000 500000 400000 300000 200000 100000 0 100% 68.7% 62.9% 69.2% 75.2% 76.5% 76.7% 76.5% 80% 60% 40% 20% FY09A FY10A Deposits (LHS) FY11A FY12E Advance (LHS) 0% FY13E C/D (RHS)

FY07A FY08A Total business (LHS) Source: BCCIR, Company data

Deposit structure: HDFC Bank has been able to maintain healthy CASA deposits. Its CASA deposits stood at around 52.7% in FY11 as against 52% in FY10. This has been instrumental in keeping the cost of fund cheaper. We expect the CASA proportion in the deposit to remain at around 52% over the next few years. During

the last three years, overall deposits grew at a CAGR of 27.4% to Rs 208,586 cr in FY11. On YoY basis it registered a growth of 24.6% in FY11. During the same period, both CASA and time deposits went up by 26.2% and 22.9% to Rs 109,908.3 cr and Rs 98,678.1 cr, respectively. Barring of a couple of years, it has grown above the industry growth rate and likely to continue the trend. We expect deposits to grow at around 21.9% between FY11 and FY13E on the back of strong network expansion. Deposit structure (Figures in Rs cr)
350000 300000 250000 200000 150000 100000 50000 0 54.5% 57.7% 44.4% 52.0% 52.7% 52.0% 52.0% 70% 60% 50% 40% 30% 20% 10% 0%

FY07A Deposits (LHS)

FY08A

FY09A

FY10A

FY11A

FY12E

FY13E CASA (RHS)

Time deposits (LHS)

CASA deposits (LHS)

Source: BCCIR, Company data

Advance mix: During the last three years, advances grew at a CAGR of

36.1% to Rs 159,982.7 cr in FY11. On YoY basis, it went up by 27.1%. The banks advance growth has continuously outperformed the industry advance growth. However, the path ahead is expected to be patchy on the back of slowing GDP growth. Banking credit growth as a whole is expected to come down. HDFC bank is expected to grow at CAGR of 21.7% between FY11 and FY13E. Retail assets form a major chunk of the advances at 42%, followed by Banking and financial institutions (Excluding NBFCs) at 8%. Road & ports and automobiles have a share of 5% each in the portfolio.
Constituent segments of advances as on March 31, 2011
Real Estate, 2% Power, 2% Iron & Steel, 2% Agriculture and Allied Activities, 3% NBFCs & Trading, 3% Source: Company data Automobiles & Trucks, 5% Other, 28% Retail Assets, 42%

Banks and Financial Institutions, 8% Roads & Ports, 5%

Revenue & profit analysis: Interest income in FY11 grew by 23.3% to Rs 19,928.2 cr as against a decline of around 1% registered in FY10. It registered strong growth in the past as well and the three year CAGR comes at around 25.4%. With the rise in the regulatory interest rates, banks have increased their lending rates and the full impact of this should be seen in FY12. We expect yields on loans of HDFC Bank to improve in the current financial year. Interest income is estimated to grow at a CAGR of 22.9% between FY11 and FY13. In FY11, total income stood at Rs 24,263.4 cr with 18% contribution coming from other income.

Loss in sale of investments brought the contribution from other income down from 20% in FY10. In the past, contribution from the other income has been in the range of around 17% to 20%. Income structure as on March 31, 2011
40000 35000 30000 25000 20000 15000 10000 5000 0 100% 80% 81% 82% 83% 80% 82% 83% 83% 80% 60% 40% 20% FY06A 19% FY07A 18% FY08A 17% FY09A 20% FY10A 18% FY11A 17% FY12E 17% 20% 0% FY13E Interest Earned % of other income (RHS) Source: BCCIR, Company data Other Income % of interest income (RHS) Total Income

Rise in interest rate is also likely to increase the cost of deposits. However, given the percentage of CASA deposits in overall deposit liability of HDFC Bank, we expect NIM to remain stable at the current level of 4.4% for FY12E and FY13E. So far NII is concerned, in FY11, it grew by 25.7% to Rs 10,543.1 cr. Going ahead, NII is expected to clock a CAGR of 21.7% between FY11 and FY13E. NIM is expected to remain stable
40000 30000 20000 10000 0 5% 5% 5% 4.4%4% 4.4% 4.4% 4.4% 4.3% 4% 4.2% 4% 4% FY06A FY07A FY08A FY09A FY10A FY11A FY12E FY13E Interest Earned (LHS) Interest Expended (LHS) NII (LHS) NIM (RHS) 4.8% 4.9%

Source: BCCIR, Company data

Over the last three years bottom line grew at a CAGR of 35.2% to Rs 3,926.4 cr in FY11. On YoY basis, net profit increased by 33.2%. We expect HDFC Bank to post PAT growth of 23.3% and 26.2% to Rs 4,840.7 and Rs 6,108.5 cr in FY12E and FY13E, respectively. ROE for FY11 stood at 16.7%. Dividend payout: During the last five years, the bank has maintained a dividend payout in the range of 22% to 23%. The payout ratio for FY10 and FY11 was to the tune of 21.7% and 22.7%, respectively.

Valuation
It is trading at a price of 473.3, which translates into trailing price to book value of 4.2. In terms of price to adjusted book value, it is available at 4.5x, 3.9x and 3.4x times its adjusted book value of FY11, FY12E and FY13E, respectively. Its current ROE is 16.7% and is likely to improve over the next couple of years. The core performance of the bank has been strong and is likely to remain strong going ahead. We give a 'Buy' recommendation on the stock with a target price of Rs 540 and an investment horizon of 6-8 months.

Company profile
HDFC Bank is the second largest private sector bank in India. Bank has demonstrated strong growth over the years and enjoys sound asset quality. Its balance sheet size stands at Rs 285,942 cr for quarter ending June 2011. The HDFC Bank was incorporated on August 1994 and commenced its operations as a SCB in January 1995. Currently, it has a branch network of 2,111 branches and 5,998 ATMs in 1,111 cities as of June 30, 2010. On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was formally approved by Reserve Bank of India to complete the statutory and regulatory approval process. As per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC Bank for every 29 shares of CBoP. In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co.) was merged with HDFC Bank Ltd., effective February 26, 2000. It provides whole gamut of banking services including Wholesale Banking Services, Retail Banking Services and Treasury. It has two subsidiaries HDFC Securities and HDB Financial Services.

Financial tables Quarterly numbers

DESCRIPTION Interest Earned Interest expense NII Other income Total income Operating expenses Total expenses Oper. Pro. bef. Prov. & Cont. Provisions & Contingencies Oper. Pro. after Prov. & Cont. Provision for Taxes APAT Gross NPAs Net NPAs % Gross NPAs % Net NPAs Net Interest Margin (%) Provision Coverage Ratio (%) Capital Adequacy Ratio (%) Tier I Capital-basel (%)
Source: BCCIR, Company data

Jun-11 5978.0 3130.0 2848.0 1120.0 7098.0 1934.6 5064.6 2033.4 443.6 1589.7 504.7 1085.0 1833.1 318.5 1.04 0.20 4.2 83.0 16.9 11.4

Jun-10 4419.7 2019.0 2400.7 990.9 5410.6 1642.9 3661.9 1748.7 555.0 1193.7 382.0 811.7 1791.2 412.5 1.21 0.30 4.2 82.5 16.3 12.2

Mar-11 5468.6 2629.1 2839.5 1255.8 6724.3 1998.4 4627.5 2096.9 431.3 1665.5 550.8 1114.7 1694.3 296.4 1.05 0.20 4.3 82.5 16.2 12.4

YoY growth (%) 35.3 55.0 18.6 13.0 31.2 17.8 38.3 16.3 -20.1 33.2 32.1 33.7 2.3 -22.8

QoQ growth (%) 9.3 19.1 0.3 -10.8 5.6 -3.2 9.4 -3.0 2.8 -4.6 -8.4 -2.7 8.2 7.5

Annual numbers
Profit & loss (Figures in Rs Cr) Particulars
Interest Earned Other Income Total Income Interest Expended Operating Expenses Total expense NII Profit before provision and contingencies Provisions and Contingencies Profit Before Tax Taxes Profit After Tax Source: BCCIR, Company data

FY09A
16332.3 3290.6 19622.9 8911.1 5532.8 14443.9 7421.2 5179.0 1879.1 3299.9 1054.9 2244.9

FY10A
16172.7 3983.1 20155.8 7786.3 5939.8 13726.1 8386.4 6429.7 2140.0 4289.7 1341.0 2948.7

FY11A
19928.2 4335.2 24263.4 9385.1 7152.9 16538.0 10543.1 7725.4 1906.1 5819.3 1892.9 3926.4

FY12E
24939.4 4987.9 29927.3 12102.5 8514.4 20617.0 12836.8 9310.3 2136.0 7174.3 2333.6 4840.7

FY13E
30076.1 6165.6 36241.7 14449.0 10163.4 24612.4 15627.1 11629.3 2576.0 9053.4 2944.8 6108.5

Balance sheet (Figures in Rs Cr) Particulars

Sources of funds Share Capital Total Reserves Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities Application of funds Cash and balance with RBI Balances with banks and money at call Investments Advances Fixed assets Other Assets Total Assets Source: BCCIR, Company data

FY09A
425.4 14220.9 14646.3 142811.6 9163.6 16242.8 183270.8

FY10A
457.7 21061.8 21519.6 167404.4 12915.7 20615.9 222458.6

FY11A
465.2 24911.1 25376.4 208586.4 14394.1 28992.9 277352.6

FY12E
467.4 28677.2 29144.6 253734.9 19186.2 32971.0 335036.8

FY13E
467.4 33429.6 33897.0 309793.1 21745.1 40240.3 405675.5

13527.2 3979.4 58817.5 98883.0 1751.0 6356.8 183270.8

15483.3 14459.1 58607.6 125830.6 2167.1 5955.1 222458.6

25100.8 4568.0 70929.4 159982.7 2214.9 14601.1 277352.6

22610.3 15331.1 85620.6 194078.2 2921.8 14472.5 335034.6

35545.3 8924.1 101872.4 237000.5 3002.8 19328.1 405673.3

Ratios Some balance sheet ratios (%)

Credit to deposit CASA Investment to deposit Gsec to total investment Source: BCCIR, Company data

FY09A
69.2 44.4 41.2 88.7

FY10A
75.2 52.0 35.0 87.1

FY11A
76.7 52.7 34.0 75.6

FY12E
76.5 52.0 33.7 85.7

FY13E
76.5 52.0 32.9 77.9

Growth Numbers Growth (%)

Advances Deposits Networth Investments Borrowings Interest income Interest expense Total income NII APAT Source: BCCIR, Company data

FY09A
55.9 41.7 27.4 19.1 99.4 61.5 82.3 58.3 42.0 41.2

FY10A
27.3 17.2 46.9 -0.4 40.9 -1.0 -12.6 2.7 13.0 31.3

FY11A
27.1 24.6 17.9 21.0 11.4 23.2 20.5 20.4 25.7 33.2

FY12E
21.3 21.6 14.8 20.7 33.3 25.1 29.0 23.3 21.8 23.3

FY13E
22.1 22.1 16.3 19.0 13.3 20.6 19.4 21.1 21.7 26.2

Ratios NPA and CAR (%)

Gross NPA (Rs cr) Net NPA (Rs cr) GNPA (%) NNPA (%) CAR CAR 1 PCR Source: BCCIR, Company data

FY09A
1988.1 627.6 2.0 0.6 15.1 10.2 68.4

FY10A
1816.8 392.1 1.4 0.3 17.4 13.3 78.4

FY11A
1694.3 296.4 1.1 0.2 16.2 12.2 82.5

FY12E
2006.5 361.2 1.0 0.2 15.8 11.6 82.0

FY13E
2390.5 430.3 1.0 0.2 15.3 11.2 82.0

Ratios Yields / profitability (%)

Yield on advance Cost of deposit Yield on investments Yield on average earning assets Interest cost on avg. int. bearing liab. Interest expense to interest income NIM PAT to total income ROA RONW Source: BCCIR, Company data

FY09A
15.0 6.6 7.4 10.7 6.9 54.6 4.9 11.4 1.4 17.2

FY10A
10.8 4.5 6.8 8.2 4.7 48.1 4.3 14.6 1.5 16.3

FY11A
10.6 4.3 7.2 8.3 4.7 47.1 4.4 16.2 1.6 16.7

FY12E
11.1 4.5 6.5 8.6 4.9 48.5 4.4 16.2 1.6 17.8

FY13E
10.9 4.4 6.6 8.5 4.8 48.0 4.4 16.9 1.6 19.4

Ratios Valuation ratios

Book value per share (Rs) Adjusted book value per share (Rs) EPS (Rs) P/B (x) P/ABV (x) P/E (x) Source: BCCIR, Company data

FY09A
68.9 65.9 10.6 2.8 3.0 18.4

FY10A
94.0 92.3 12.9 4.1 4.2 30.0

FY11A
109.1 107.8 16.9 4.4 4.5 28.7

FY12E
124.7 123.2 20.7 3.9 3.9 23.4

FY13E
145.0 143.2 26.1 3.3 3.4 18.5

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