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24 August 2017
Target Price Change
Gautam Chhugani
India Financials +65-6230-4654
gautam.chhugani@bernstein.com
HDFC Bank Ltd
Gaurav Jangale, ACA
+65-6230-4682
Rating
gaurav.jangale@bernstein.com
Outperform
Target Price
We are increasing HDFC Bank's target price to INR2,430, implying ~40% upside from current Close Date 22-Aug-2017
levels. HDFC Bank is executing on a formula: Acquire customers (via branch, digital), engage HDFCB.IN Close Price (INR) 1,747.00
customers across its digital platforms, sell products (rather customer self-selects in the digital Target Price (INR) 2,430.00
world); the platform learns using AI and feeds it back to the platform. The result is sustained Upside/(Downside) 39%
market share gain, quality customer base, low cost of acquisition, customized and more
52-Week Low 1,158.00
intelligent cross-sell and re-allocation of employee base to high value customers.
52-Week High 1,810.00
As part of our fintech deep-dive, we spoke to HDFCB's digital banking head, Nitin Chugh. We MXAPJ 527.67
believe HDFC bank is executing a solid digital transformation that will drive faster growth, FYE Mar
better cross-sell and sustained efficiency gains. HDFCB will improve cost efficiency by over Indicated Div Yield 0.6%
500bps in next 3 years. We are 200 bps lower than consensus on cost/income ratio in
Market Cap (INR) (B) 4,548
FY'20E. To cut through the digital noise, just track HDFCB's mobile transactions leadership
EV (INR) (M) NA
and its Apple mobile app downloads (Refer Exhibits 15 to 17)
We compared India to a multi-decade view of consumer growth cycle in mature economies. Performance YTD 1M 6M 12M
We believe the current growth cycle will be led by ex-mortgage consumer credit (cards, Absolute (%) 46.4 3.7 26.7 41.1
personal loans, auto etc.) with significant headroom to increase consumer leverage over next MXAPJ (%) 23.7 0.6 12.0 17.6
5 years. Digital/mobile led acquisition will accelerate consumer loan growth relative to the
Relative (%) 22.8 3.2 14.7 23.6
previous decade. HDFCB is a clear market leader with 34% market share in ex-mortgage
consumer credit. We expect wholesale loan growth to accelerate driven by project loans
business. We are ahead of consensus by 300 bps on total loan CAGR for FY17-20E. Bernstein
Analyst Page
Events
We are 8% ahead of consensus on FY'20E earnings. We expect the HDFCB earnings multiple
Company
to get further re-rated upwards. We roll forward our estimates to value this on FY'20E. Page
Investment Implications
We rate HDFCB Outperform with a target price of INR 2,430 implying a ~40% upside.
EPS Reported F17A F18E F19E Financials F17A F18E F19E CAGR Valuation Metrics F17A F18E F19E
HDFCB.IN (INR) 59.16 71.98 89.11 Credit Cost (%) 0.69 0.80 0.70 P/E Reported (x) 29.53 24.27 19.60
OLD 71.65 88.84 Net Interest Margin (%) 4.37 4.42 4.37 Div Yield (%) 0.63 0.79 0.97
See Disclosure Appendix of this report for important disclosures and analyst certifications www.bernsteinresearch.com
This document is being provided for the exclusive use of HITESH SHAH at GILDER GAGNON HOWE &
TICKER TABLE
22 Aug 2017 TTM EPS Reported P/E Reported
Closing Target Rel.
Ticker Rating Price Price Perf. 2017A 2018E 2019E 2017A 2018E 2019E
HDFCB.IN O INR 1,747.00 2,430.00 23.6% INR 59.16 71.98 89.11 29.53 24.27 19.60
OLD 1,510.00 71.65 88.84
MXAPJ 527.67 30.22 36.42 39.93 17.46 14.49 13.21
TARGET PRICE CHANGE / ESTIMATE CHANGE IN BOLD O - Outperform, M - Market-Perform, U - Underperform, N Not Rated
DETAILS
A. CONSUMER CREDIT CYCLE IN INDIA WILL CONTINUE ACCELERATING WITH SIGNIFICANT HEADROOM
EXHIBIT 1: We estimate India's per capita consumer credit (ex-mortgage) to grow by 20% CAGR till FY26'E
25,000
20,000
15,000
10,000
5,000
80
60
40
30
20
B. HDFC BANK WILL SUSTAIN CONSUMER LEADERSHIP AND IMPROVE SHARE IN WHOLESALE
EXHIBIT 4: We estimate HDFC Bank's loan growth to accelerate further as it increases share in wholesale term loans and
maintains its leadership in consumer credit.
25%
20%
5%
0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Bersntein estimates Consensus estimates
EXHIBIT 5: HDFC has been consistently growing faster than EXHIBIT 6: not only on the consumer book
the system;
HDFCB vs. System: Total Loans, y- HDFCB vs. System: Total Consumer
o-y growth (%) loans, y-o-y growth (%)
140%
80%
70% 120%
60% 100%
50%
80%
40%
60%
30%
20% 40%
10% 20%
0% 0%
Mar-05
Mar-12
Mar-17
Mar-02
Mar-03
Mar-04
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-13
Mar-14
Mar-15
Mar-16
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
System growth HDFC's growth System growth HDFC's growth
Source: RBI, Company disclosures, Bernstein analysis Source: RBI, Company disclosures, Bernstein analysis
EXHIBIT 7: but also recently on the corporate book led by EXHIBIT 8: HDFC Bank's forte non-mortgage consumer
cherry picking of viable project loans lending book - is witnessing strong momentum
HDFCB vs. System: Total Corporate
HDFCB vs. System: Consumer loans
loans, y-o-y growth (%)
(ex-Mortgage), y-o-y growth (%)
60% 35%
50% 30%
40% 25%
30% 20%
20% 15%
10% 10%
0% 5%
Jun-15
Jun-16
Jun-17
Mar-16
Mar-17
Dec-15
Dec-16
Sep-15
Sep-16
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Source: RBI, Company disclosures, Bernstein analysis Source: RBI, Company disclosures, Bernstein analysis
34% 51%
15%
13%
14%
12%
5% 5%
4%
3%
2% 1%
HDFCB ICICIB Axis Yes IIB Kotak HDFCB ICICIB Axis IIB Kotak Yes
Bank Bank
.
EXHIBIT 10: The banks' consumer portfolio is driven by the non-mortgage component, particularly its continued leadership in
high yielding credit cards and personal loans
40%
30% Commercial
2.0% SME
Vehicles
20%
Mortgage
10% Car Loan
1.0%
0% Corporate
Jun-14
Jun-15
Jun-16
Jun-17
Mar-15
Mar-16
Mar-17
Dec-14
Dec-15
Dec-16
Sep-14
Sep-15
Sep-16
0.0%
Personal Loans Credit Cards 4.0% 8.0% 12.0% 16.0% 20.0% 24.0%
Business Banking Home Loans
Agri and gold loans Vehicle loans Loan yield
Others
Note: The above data on consumer loan mix refers to domestic retail mix is as per regulatory segment reporting guidelines
Source: Company disclosures, Bernstein analysis
EXHIBIT 11: HDFC Bank's combined personal loan and credit card portfolio accounts for ~28% of the total consumer
book...highest amongst its peer group
Total Personal loan & Credit card Total Personal loan & Credit card
debt outstanding, in INR bn debt as a % of Total Consumer loans
846 28%
26% 27%
761
24%
577
18%
17%
420 15% 15%
12%
11% 11%
240 247 9% 9%9%
216 8%
202 7%
156 152 97
101 81 93
109
52
HDFC Bank ICICI Bank Axis Bank Kotak Bank HDFC Bank Kotak Bank Axis Bank ICICI Bank
C. EXECUTION ON THE DIGITAL PLATFORM WILL DRIVE LOW COST AND ACCELERATED CUSTOMER
ACQUISITION
60%
55%
50%
45%
40%
35%
30%
25%
20%
FY'18E
FY'19E
FY'20E
FY'98
FY'99
FY'00
FY'01
FY'02
FY'03
FY'04
FY'05
FY'06
FY'07
FY'08
FY'09
FY'10
FY'11
FY'12
FY'13
FY'14
FY'15
FY'16
FY'17
EXHIBIT 13: Internet penetration is fast rising in India EXHIBIT 14: and mobile phone is becoming the dominant
access point
80%
355
277 50%
198
149
111
84
Global Average
Germany
Phillipines
UK
Singapore
Australia
Russia
USA
Thailand
Nigeria
China
Mexico
Italy
India
Malaysia
South Korea
Japan
South Africa
Indonesia
Brazil
France
Spain
Canada
66
54
Source: Kleiner Perkins / Mary Meeker May'17 Report, Bernstein analysis, Source: Kleiner Perkins / Mary Meeker May'17 Report, Bernstein analysis,
IAMAI,UN Population Division, Worldometer, Bernstein analysis Hootsuite, Statcounter, Bernstein analysis
EXHIBIT 15: In this context, HDFC Bank is dominating the EXHIBIT 16: and is also getting sizeable traction on Android
mobile banking app downloads on Apple (high quality platform.
customers) ...
Last 365 days: Mobile banking apps - Last 365 days: Mobile bank ing apps -
Apple downloads (in '000) Android downloads (in '000)
646
3,186
2,825
471 2,500
2,098
260
53
HDFC Bank Axis Bank Kotak + 811 ICICI Bank ICICI Bank HDFC Bank Axis Bank Kotak + 811
mobile mobile mobile mobile bankingmobile bankingmobile banking
banking banking banking
EXHIBIT 17: HDFC Bank's mobile transaction leadership is unmatched in the industry
13%
10%
9%
6,354
2% 3%
1,721 3% 2% 1%
2 27 16 30 151 317
28%
19%
17% 16%
15% 15%
14% 13%
13%
15% 16%
10% 9% 9%
10% 9% 10%
4% 4%
2% 3%
2% 3%
1%
2%
4,014
3,403
3,062
2,544
1,986
1,725
1,412
684 761
467 535
231 312
2 14 32 56 78 111 131 171
651
611
558
518
506
341
313
261
81 68 77
60
24 33 40
12 18 22 20
88
84
76
69
66 68
56
53
52
38
21
15
9
4 5 6
3
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
HDFCB: Increase in number of employees, in '000
16.4
14.9
11.3
10.3
8.1
6.6
5.8
(0.8) (0.9)
(3.2)
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Ref. Comment
NII is higher as we revise our NIM estimate upward after a strong performance in FY'17 (+10 bps beat to our estimate)
1
and we expect HDFC Bank to hold their NIMs going forward
Fee income growth to remain robust driven by robust volume growth - corporate as well as retail - as well as increasing
2
cross-sell opportunities
We have cut down our our cost to income estimates as we see significant potential of ongoing digitisation initiatives as
3
well as increasing share of term loans in total loans to control costs
US vs. THEM
Note: 1. PPOP = Pre-provision operating profits 2. Consensus estimate is from Bloomberg as of 18th August 2017
Source: Company disclosures, Bloomberg, Bernstein analysis and estimates
HDFC BANK
All figures In INR Million
Mar-16 Mar-17 Mar-18E Mar-19E Mar-20E
BALANCE SHEET
Standalone:
Loans 4,645,940 5,545,682 6,894,842 8,548,731 10,564,262
Deposits 5,464,242 6,436,397 7,623,330 9,224,229 11,161,317
Total assets 7,407,961 8,638,402 10,451,054 12,664,011 15,440,312
Consolidated:
Consol. Shareholder's equity 744,847 744,847 744,847 744,847 744,847
Consol. BVPS 294 358 421 498 593
Shares o/s, Closing (mn) 2,528 2,563 2,587 2,614 2,644
KEY RATIOS
Standalone:
Loan g 27% 19% 24% 24% 24%
GNPA % 0.9% 1.1% 1.4% 1.4% 1.4%
Consolidated:
Consol. ROAE 19% 18% 19% 20% 21%
DISCLOSURE APPENDIX
VALUATION METHODOLOGY
India Financials
India is a growth market and investors generally seek growth-based returns in India. We believe all banks in India trade on what
market believes as the sustainable earnings growth momentum. Banks that have sustained cross-cycle earnings growth
despite sector asset quality concerns trade at a premium. On the other hand, banks that have been inconsistent in earnings
growth get penalized by the market until they build investor confidence again. We value our coverage on a target P/E multiple
based on one year forward earnings calibrated by trading history and our expectation of three-year sustainable earnings
growth. We use a one-year forward multiple based on FY'19 earnings to arrive at FY'18 end target price. We corroborate our
target price earnings multiples with a P/BV based multiple as a secondary check. We also believe the market can be brutal with
growth stocks if the growth story shows any structural weakness and thus we constantly stress-test for structural growth
weakness across our industry and company investment thesis. This methodology works for banks under NPL stress too as we
expect earnings to largely normalize by FY'19
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