HDFC Bank

Company Update | BFSI | HDFCB IN

Semi-functioning economy - No problem | Steady at core;

Institutional Equity Research | India
leadership transition to the fore July 20, 2020

 Steady P&L outcomes driven by healthy loan growth (+21% YoY), Rat ing Target Price (Rs) Upside/ Downside (%)

stable NIMs (4.3%) and cost efficiencies (C/I at 35%) BUY 1,330 21
 Corporate book drives incremental portfolio skew (53% of loans); M a rk e t da t a
C urre nt pric e Rs 1,0 9 8
qualitative disclosures encouraging but cannot be extrapolated
M kt capit alisat ion USDm 83,624

 Leadership depth and in-house succession plan reassuring but Average daily value 3M USDm 263.6
Free f loat % 73.9
not cast in stone; await formal RBI approval Promot er holding % 26.1

 “Morat-portfolio” at ~9% significantly lower than peer banks;

1 Y e a r P e rf o rm a nc e
proactive reserve-build positive for balance sheet; maintain BUY 120

Steady P&L outcomes: Despite only a semi-functioning economy, HDFC Bank

100
reported a steady set of P&L outcomes (PPOP growth of +15% YoY) driven by
strong loan growth (+21% YoY), impressive efficiency (C/I at 35%, best-in-class 80
among banks with a retail-heavy portfolio) and stable NIMs (4.3%). The bank
accelerated impairment recognition on its non-morat portfolio basis its internal 60
models and augmented its reserve-build further to shore up its balance sheet. Jul-19 Oct-19 Jan-20 Apr -20 Jul-20

Morat-book at a mere 9%; internal markers imply improvement in portfolio: HDFC Bank Nifty Index

HDFCB’s loan book under moratorium stands at ~9%, compared to +20% for most Source: Bloomberg

lenders (although disclosures are non-standardized). Management commentary

suggests ~70% of customers who opted for the first moratorium have paid their
dues in full. Moreover, SME portfolio quality under stress had halved as per internal
stress tests, weighted average score of wholesale portfolio has improved and over
98% of salaried customers currently under moratorium received their salary credits
in Jun’20. While these disclosures provide some comfort on asset quality, we
remain vigilant of the asset quality shocks once the moratorium lapses.

Strong internal contender awaits regulatory approval: With the incumbent MD

& CEO’s tenure coming to an end in Oct’20, Mr. Aditya Puri reassured investors on
the robust systems and processes for a smooth and seamless transition. While
there is no disputing the in-house leadership depth and the quality of the franchise
(sustainable moats), we continue to await the RBI’s formal approval.

Core holding in every financials portfolio: HDFCB’s market share gains continue
to accelerate (~10% in Q1FY21 vs. 5.1% in FY14). We revise our FY21 EPS
estimates downward to factor in lower loan growth, higher credit costs, softer fee
environment and better cost efficiency. We reiterate BUY with an SoTP-based TP
of Rs1,330 valuing the core bank at 3.3x Mar’22 BVPS, HDB Financial at 2.5x
Mar’22 BVPS and HDFC Securities at 15x FY22 EPS. We expect the bank’s
valuation premium to sustain on the back of a superior customer franchise driving
market share gains and best-in-class ROEs.

Financial Summary (Standalone)

Y/E March (Rs m n) FY18 FY19 FY20 FY21e FY22e
Net interest income 400,949 482,432 561,861 660,214 765,428
Pre-provisioning profit 326,248 397,497 487,494 565,535 672,931
PAT 174,867 210,781 262,572 277,544 340,678
Krishnan ASV
EPS (Rs) 67.4 77.4 47.9 50.6 62.1 Analyst - BFSI
BVPS (Rs) 409.6 547.9 311.8 350.3 397.6 +91 22 4348 7184
P/ABV (x) 5.5 4.1 3.6 3.3 2.9 krishnan.asv@sbicapsec.com
Advances Grow th (%) 18.7 24.5 21.3 15.0 18.5
Deepak Shinde
ROE (%) 17.9 16.5 16.4 15.3 16.6 Associate - BFSI
CET 1 (%) 12.3 14.9 16.4 16.3 15.9 +91 22 4227 3428
Source: Company, SSLe deepak.shinde@sbicapsec.com

SBICAP Research on Bloomberg SBICAP <GO>, www.emis.com Please refer to our disclaimer given at the last page.
HDFC Bank SBICAP Securities Ltd
Exhibit 1: Quarterly Financials

Y/E March (Rs m n) 1QFY21 1QFY20 YoY (%) 4QFY20 QoQ (%) FY20 FY19 YoY (%)
Interest earned 303,780 273,916 10.9 298,851 1.6 1,148,127 989,721 16.0
Interest expended 147,126 140,973 4.4 146,810 0.2 586,264 507,288 15.6
Net interest incom e 156,654 132,943 17.8 152,041 3.0 561,863 482,432 16.5
Other income 40,753 49,703 (18.0) 60,326 (32.4) 232,608 176,259 32.0
Total Incom e 197,407 182,645 8.1 212,366 (7.0) 794,471 658,691 20.6
Operating expenses 69,115 71,173 (2.9) 82,778 (16.5) 306,975 261,194 17.5
Staff expenses 25,134 22,174 13.4 24,983 0.6 95,257 77,618 22.7
Operating profit 128,293 111,472 15.1 129,588 (1.0) 487,496 397,497 22.6
Non-tax provisions 38,915 26,137 48.9 37,885 3 121,464 75,501 60.9
Profit before tax 89,378 85,336 4.7 91,703 (2.5) 366,032 321,996 13.7
Taxes 22,791 29,654 (23.1) 22,466 1.4 103,498 111,215 (6.9)
Tax rate (%) 25.5 34.8 -925bps 24.5 100bps 28.3 34.5 -626bps
Reccuring Profit after Tax 66,586 55,682 19.6 69,237 (3.8) 262,533 210,781 24.6
Extraordinary income 0 0 0 0 0 0 0 0
Reported Profit after Tax 66,586 55,682 19.6 69,237 (3.8) 262,533 210,781 24.6

Source: Company, SSLe

Exhibit 2: Key balance sheet parameters

(Rs bn) 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 YoY (%) QoQ (%)
Deposits 8,058 8,334 8,525 9,231 9,546 10,216 10,674 11,475 11,894 24.6 3.7
CASA % 41.7 42.0 40.7 42.4 39.7 39.3 39.5 42.2 40.1
Net Advances 7,086 7,508 7,810 8,194 8,297 8,970 9,360 9,937 10,033 20.9 1.0
Retail % 53.7 53.5 53.9 52.7 53.4 51.4 51.3 49.8 47.3
Wholesale % 46.3 46.5 46.1 47.3 46.6 48.6 48.7 50.2 52.7
Total Assets 10,804 11,699 11,686 12,445 12,653 13,251 13,953 15,305 15,451 22.1 1.0
C/D ratio 87.9 90.1 91.6 88.8 86.9 87.8 87.7 86.6 84.4
NIM (Reported) 4.20 4.30 4.30 4.40 4.30 4.20 4.20 4.30 4.30
Cost-to-income ratio 40.9 39.9 38.4 39.6 39.0 38.8 37.9 39.0 35.0
Opex to assets ratio 2.43 2.42 2.47 2.49 2.40 2.40 2.47 2.45 1.96
GNPA 95.4 101.0 109.0 112.2 117.7 126.1 134.3 126.5 137.7 17.0 8.9
GNPA % 1.33 1.33 1.38 1.36 1.40 1.38 1.42 1.26 1.36
NNPA 29.1 30.3 33.0 32.1 35.7 37.9 44.7 35.4 32.8 (8.1) (7.4)
NNPA % 0.41 0.40 0.42 0.51 0.43 0.42 0.48 0.36 0.33
PCR (%) (Reported) 70 70 70 71 70 70 67 72 76
Gross Slippages 35.5 32.9 40.0 35.8 42.3 37.1 53.4 88.4 35.6 (15.8) (59.8)
RWA 8,449 8,865 9,082 9,319 9,656 9,633 9,510 9,947 10,108 4.7 1.6
% of Total Assets 78.2 75.8 77.7 74.9 76.3 72.7 68.2 65.0 65.4
CAR 14.8 17.1 17.3 17.1 16.9 17.5 18.5 18.5 18.9
Tier 1 13.1 15.6 15.8 15.8 15.6 16.2 17.1 17.2 17.5

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 2

HDFC Bank SBICAP Securities Ltd
Exhibit 3: DuPont analysis (% of average assets)

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21

Net interest incom e 4.4 4.5 4.6 4.6 4.5 4.4 4.4 4.5 4.4
Other income 1.6 1.5 1.8 1.7 1.7 1.8 2.1 1.8 1.2
Total income 5.9 6.1 6.4 6.3 6.2 6.2 6.5 6.3 5.6
Operating expenses 2.4 2.4 2.5 2.5 2.4 2.4 2.5 2.4 2.0
Employee expenses 0.7 0.7 0.7 0.7 0.7 0.8 0.8 0.7 0.7
Pre-provisioning profit 3.5 3.6 4.0 3.8 3.8 3.8 4.0 3.8 3.6
Provisions 0.7 0.7 0.8 0.7 0.9 0.9 1.0 1.1 1.1
PBT 2.9 2.9 3.2 3.1 2.9 2.9 3.1 2.7 2.5
PAT 1.9 1.9 2.1 2.1 1.9 2.1 2.3 2.0 1.9
RoRWA 2.4 2.5 2.7 2.7 2.5 2.7 3.1 2.9 2.7

Source: Company, SSLe

Exhibit 4: HDFC Bank continues to sustain industry leading ROAs, driving its valuation premium

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21e FY22e

Net interest incom e 4.1 4.1 4.2 4.2 4.2 4.2 4.0 4.0 3.9
Other income 1.8 1.7 1.7 1.6 1.6 1.5 1.7 1.6 1.6
Total income 5.9 5.8 5.9 5.8 5.7 5.7 5.7 5.6 5.5
Operating expenses 2.7 2.6 2.6 2.5 2.4 2.3 2.2 2.0 2.0
Employee expenses 0.9 0.9 0.9 0.8 0.7 0.7 0.7 0.7 0.7
Pre-provisioning profit 3.2 3.2 3.3 3.3 3.4 3.4 3.5 3.5 3.6
Provisions 0.4 0.4 0.4 0.5 0.6 0.7 0.9 1.1 1.1
PBT 2.9 2.8 2.9 2.8 2.8 2.8 2.6 2.5 2.5
PAT 1.9 1.9 1.9 1.9 1.8 1.8 1.9 1.8 1.9

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 3

HDFC Bank SBICAP Securities Ltd

Steady P&L outcomes in a turbulent quarter

Earnings profile remained steady

HDFC Bank reported a steady set of P&L outcomes during a quarter largely impacted by
lockdowns. Net interest income grew by 18% YoY with steady NIMs at 4.3% [Q4FY20: 4.3%].
NIM was impacted by ~10bps because of higher cost of carry due to strong deposits growth,
leading to LCR of ~142% during the quarter. Other income declined by 18% YoY due to significant
impact on retail businesses and recoveries during the quarter, while strong treasury income
(+413% YoY) on monetisation of some investments provided some support. Operating
efficiencies, best-in-class (among retail-heavy lenders), was exceptionally low at 35% due to
lower sales promotions, retail originations etc.

Exhibit 5: NII growth steady during the quarter Exhibit 6: Earnings growth benefited from cost efficiency

160 34 80 38

120 28 60 31

(Rs bn)
(Rs bn)

(%)
(%)
80 22 40 24

40 16 20 17

0 10 0 10
3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21
3QFY16

1QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21
3QFY17

NII % YoY (RHS) PAT % YoY (RHS)

Source: Company, SSLe

Fee income witnesses COVID shock; expected to bounce back

HDFC Bank’s fee income witnessed COVID shock due to lower sales originations, distribution
income, lower card spends, waiving of fees due to moratorium etc. Fee income declined by 37%
YoY, 47% QoQ, while miscellaneous income (including recoveries) was also down by 49% YoY.
According to management, fee income was impacted by Rs.17bn and recovery income was
impacted by Rs.3bn due to COVID and lockdowns. Retail segment contributed to contribute
majority share of fees (87% of fees). Treasury income provided strong support to non-interest
income because of drop in G-sec yields and monetization of investments of the bank.

Exhibit 7: Fee income dropped sharply during Q1FY21 Exhibit 8: Branch productivity in distribution income

48 1.50 4.8

36 1.25 3.6
(Rs bn)

(Rs mn)
(%)

24 1.00 2.4

12 0.75
1.2

0 0.50
0.0
3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

FY14

FY16

FY18
FY12

FY13

FY15

FY17

FY19

Fees & Commissions % of avg earning assets Axis Bank ICICI Bank HDFC Bank

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 4

HDFC Bank SBICAP Securities Ltd

Strong operating efficiencies but a limited runway from hereon

Improving cost efficiencies because of subdued retail business activities

HDFC Bank has been consistently building cost efficiencies to augment its core profitability. Its
core C/I ratio has been steadily trending downwards and, at 35%, remains the best-in-class,
particularly among retail-focused banks. The opex-to-assets ratio has witnessed consistent
improvement driven by initiatives such as higher sales productivity and redeployment of staff. The
improvement in cost efficiency has been remarkable despite the increase in advertising and sales
promotion over the near-term.

HDFC Bank reported exceptional C/I ratio at 35% during the quarter, driven by a highly-variable
cost structure – slow business momentum implies lower origination fees paid out to sales agents
and limited sales promotions. While the bank has been making continuous efforts on improving
productivity and cost efficiency, we build in limited sustainability of these benefits once the retail
business momentum picks up pace.

Exhibit 9: Cost to income ratio best among peers Exhibit 10: Opex to assets improving

52 3.5

46 3.0
(%)

(%)

40 2.5

34 2.0

28 1.5
1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

1QFY15
3QFY15
1QFY16
3QFY16
1QFY17
3QFY17
1QFY18

1QFY19
3QFY19
1QFY20
3QFY20
1QFY21
3QFY18
Axis Bank ICICI Bank HDFC Bank Axis Bank ICICI Bank HDFC Bank

Source: Company, SSLe

Branch productivity remains best-in-class

HDFC Bank’s branch productivity remains the best-in-class with sweating of the existing branch
franchise. Branch productivity on deposits has improved significantly since Q1FY17 and is now
almost 2x as productive as its peers. As the existing branch network matures, HDFCB is witnessing
a sharp rise in productivity, further accentuated by the increasing shift towards digitization.

Exhibit 11: CASA per branch marching ahead of peers for HDFC Bank

1,000

800
(Rs mn)

600

400

200
1QFY15

3QFY15

1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

Axis Bank ICICI Bank HDFC Bank

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 5

HDFC Bank SBICAP Securities Ltd

Relentless focus on market share gains

Market share gains - driven by the corporate segment
HDFC Bank has been consistently gaining market share on both sides of the balance sheet
(advances and deposits) as it continues to deliver steady 20%+ balance sheet growth every
quarter, thereby commanding ~10% loan market share and ~9% deposit market share. The
wholesale segment reported strong growth (+37% YoY) as the bank continues to build wallet-
share gains in highly-rated corporates across sectors, while simultaneously focused on new client
acquisition from other banks. The share of AA & above rated corporates has been steadily
increasing, aiding optimization on risk-weighted assets, although leading to some moderation in
margins. Moreover, HDFCB has been able to exercise pricing power better than its peers, thus
generating higher margins as the bank is mostly focused on working capital loans.

Exhibit 12: Approaching double-digit loan market share Exhibit 13: Consistent rise in deposit market share

12 10 14.0 10

9 8 10.5 8

(Rs trn)
(Rs trn)

(%)
(%)

6 6 7.0 6

3 4 3.5 4

0 2 0.0 2
FY13

FY14

FY16

FY17

FY18

FY19

FY20
FY12

FY15

Q1FY21

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20
FY12

Q1FY21
Net advances Market Share (RHS) Deposits Market Share (RHS)

Source: RBI, Company, SSLe

Retail loan growth moderates sharply

The moderation in retail lending took a sharp downturn during the quarter (7.2% YoY). Retail
lending for HDFC Bank had been witnessing moderation for the last five quarters because of
slowdown in the vehicle segment and moderation in unsecured portfolio growth for monitoring of
portfolio performance (mostly credit cards and personal loans). The portfolio performance has
been steady as per the management. Credit cards and personal loans, accounting for ~18% of
loans, remain high yielding and high-ROA generating segments for HDFC Bank, in our view. As
the economy opens up, retail loans (down sequentially by 4% QoQ) are expected to pick up
although the extent of growth remains uncertain as of now.

Exhibit 14: Overall loan growth steady Exhibit 15: Retail as % of loan mix drops to 47%

32 100 60

24 93 55
(%)

(%)
(%)

16 86 50

47.3
8 79 45

40
0 72
3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21
3QFY16

1QFY17

3QFY17

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21
1QFY18

Advances growth (YoY) C/D ratio (RHS) Retail as % of loan book

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 6

HDFC Bank SBICAP Securities Ltd

Exhibit 16: Wholesale segment drives the loan growth for HDFC Bank during the quarter

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21

Housing 13.5 19.6 35.8 42.1 26.7 25.4 19.2 23.1 12.3
Business Banking 28.7 19.0 18.6 5.4 10.9 15.7 13.6 12.4 5.0
2W 41.3 40.8 31.3 15.9 9.1 1.7 0.5 (1.9) (5.0)
Car 17.6 16.3 13.6 5.6 5.5 0.6 0.7 4.0 (1.0)
CV 26.1 26.0 26.9 22.8 17.6 11.7 3.5 1.1 (4.9)
Credit Cards 32.2 31.5 33.4 29.1 28.8 28.4 28.6 23.5 10.4
Personal loan 40.2 37.5 32.9 29.4 24.8 22.4 23.3 24.3 14.8
Gold Loan 2.6 2.5 2.1 2.4 2.3 2.4 3.0 4.7 6.5
Kisan Gold card 19.7 16.0 13.1 11.7 10.6 8.3 10.9 11.8 9.2
LAS 20.8 13.7 7.0 3.6 1.8 0.2 1.3 (4.3) (15.7)
Others 29.7 26.5 25.6 28.7 10.9 9.5 15.0 12.2 10.1

Retail 25.6 23.8 24.0 19.0 16.5 14.7 14.1 14.6 7.2
Wholesale 18.0 24.5 23.4 31.1 17.8 24.9 26.6 28.7 36.7
Total 22.0 24.1 23.7 24.5 17.1 19.5 19.9 21.3 20.9

Source: Company, SSLe

Exhibit 17: Loan mix shifting towards wholesale

1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21

Housing 6.2 6.4 6.6 6.3 6.7 6.7 6.6 6.4 6.2
Business Banking 7.3 7.2 7.1 7.0 7.0 7.0 6.8 6.5 6.0
2W 1.3 1.3 1.3 1.2 1.2 1.1 1.1 1.0 1.0
Car 11.0 10.7 10.6 9.8 9.9 9.0 8.9 8.4 8.1
CV 3.5 3.4 3.5 3.5 3.5 3.2 3.0 2.9 2.8
Credit Cards 5.4 5.4 5.7 5.7 6.0 5.8 6.2 5.8 5.5
Personal loan 11.0 11.1 11.4 11.3 11.7 11.4 11.7 11.6 11.1
Gold Loan 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.5 0.6
Kisan Gold card 4.7 4.8 4.5 4.7 4.4 4.4 4.2 4.4 4.0
LAS 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1
Others 2.3 2.2 2.2 2.2 2.2 2.1 2.1 2.0 2.0

Retail 53.7 53.5 53.9 52.7 53.4 51.4 51.3 49.8 47.3
Wholesale 46.3 46.5 46.1 47.3 46.6 48.6 48.7 50.2 52.7

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 7

HDFC Bank SBICAP Securities Ltd

A zero-sum game on the deposit side

CASA growth gaining traction; ratio hovering above 40%
HDFC Bank’s CASA growth seems to have received fresh stimulus post the Yes Bank deposit
crisis in Mar’20. CASA grew by 26% YoY [Q4FY20: 24% YoY] outpacing the loan growth. CASA
growth had lagged for several previous quarters, leading to HDFCB relying more on term deposits,
which drives up the cost of deposits (and, consequently, cost of funds). With strong asset growth,
the CASA engine needs to deliver at a similar pace for stable funding mix.

CASA ratio now hovers above 40% for second consecutive quarter. HDFC Bank is expanding its
distribution network (branches, VRMs, CSCs) to enhance its liability franchise. Corporate CASA
deposits grew + 25% YoY [+37% YoY on an average basis) as the bank continues to build and
expand its corporate relationships.

Narrative shifting toward CASA + RTD from just CASA ratio

HDFCB’s narrative has shifted towards focusing on CASA+RTD (retail term deposits), which are
sticky in nature and help maintain LCR requirements. HDFCB’s high-yielding share of loans has
tended to offset the higher cost of raising retail term deposits. While the pressure on raising
deposits has eased in the near-term (leading to narrowing of differential between Private banks’
and PSBs term deposit rates), the bank remains focused on retail deposits. The bank has been
recalibrating retail TD rates to stay competitive in select time buckets. This may have funding cost
implications but pricing power should proportionally shore up asset yields.

Exhibit 18: CASA growth vs. loan growth Exhibit 19: Term deposits growth moderates

40 40

30 30
(%)

(%)

20 20

10 10

0 0
3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

CASA Growth (YoY) Loan Growth (YoY) Term Deposits Growth (YoY) Loan Growth (YoY) 1QFY21

Source: Company, SSLe

Exhibit 20: Branch network expansion Exhibit 21: CASA ratio now at 40.1%

6,000 400 5,000 50

5,000 250 3,750 45

(Rs bn)
(x)

4,000 100
(x)

2,500 40
(%)

3,000 (50) 1,250 35

2,000 (200) 0 30
3QFY15
1QFY16
3QFY16
1QFY17
3QFY17
1QFY18
3QFY18
1QFY19
3QFY19
1QFY20
3QFY20
1QFY21

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21

Net branches added (RHS) (x) Branches (x) CASA CASA share (RHS)

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 8

HDFC Bank SBICAP Securities Ltd

Moratorium book: So far, so good

Moratorium granted at ~9% of loan book
HDFC Bank’s “morat” disclosures indicate “all-is-well” in their loan book portfolio. Only 9% of the
loan book is under moratorium as on 30th Jun’20 (peak moratorium data unavailable). ~70% of
the customers who had opted for the first moratorium (Mar’20 to May’20) made all due payments
at the end of the moratorium. Within the existing 9% of the loan book under moratorium, only 10%
had not opted for the first moratorium, ~97% customers were 0-dpd at the time of granting of
moratorium and ~98% of the salaried customers received their salary credit for the month of
Jun’20.

While these disclosures provide some comfort on the expected asset quality shocks at the end of
the moratorium period, the non-standardized disclosures across lenders make it difficult for us to
assess the relative ability of the banks to absorb impending asset quality shocks. Moreover, there
have been limited disclosures on the movement of the morat-book over the past couple of months.

Positive surprise from stress tests and portfolio trends

HDFC Bank’s internal stress tests and portfolio analysis for testing portfolio resilience indicate
improvement during a quarter when the economic activity came to a near standstill. The portfolio
under stress (might face difficulty in servicing debt obligations) came down to ~4% from 9% a
quarter ago. On the corporate side, the weighted average score of the unsecured wholesale
portfolio based on internal rating improved to 3.45 (Q4FY20: 3.5). The overall weighted average
score of the wholesale portfolio is at 4.4 (Q4FY20: 4.43). The corporate salary customers
witnessed average salary hike of 2% and the personal loans portfolio exposure to employees of
companies, which had pay cuts of over 20%, was ~5%. These disclosures indicate the
improvement in portfolio quality during the quarter; however, the true extent of asset quality
shocks would only be visible once the moratorium lapses.

Accelerated recognition, provisioning during the quarter

HDFC Bank reported slippages of 1.2% (annualized) from the customers’ pool, which did not opt
for moratorium and were likely to be under stress based on the bank’s analytical models.
Provisioning included Rs.10bn of contingent provisions, taking the total stock of contingent and
floating provisions to Rs.54.5bn (54bps of total loan book, 6% of the loan book under moratorium).

Exhibit 22: GNPA, NNPA remain among best-in-class Exhibit 23: Slippages steady

2.0 3.2

1.36
1.5 2.4
(%)

(%)

1.0 1.6 1.2

0.5 0.33 0.8

0.0 0.0
1QFY16

3QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

1QFY20

3QFY20

1QFY21
3QFY19

1QFY16

1QFY17

3QFY17

1QFY18

3QFY18

1QFY19

3QFY19

1QFY20

3QFY20

1QFY21
3QFY16

GNPA NNPA Slippages (%)

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 9

HDFC Bank SBICAP Securities Ltd

Exhibit 24: Credit costs

2.0

1.5
(%)

1.0

0.5

0.0
1QFY18

2QFY18

3QFY18

1QFY19

2QFY19

3QFY19

4QFY19

2QFY20

3QFY20

4QFY20
4QFY17

4QFY18

1QFY20

1QFY21
Credit cost %

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 10

HDFC Bank SBICAP Securities Ltd

Valuation premium to sustain; maintain BUY

ROE and ROA to sustain over the medium-term, driving valuation premium
HDFCB’s ROA and ROE have been consistent across cycles driven by its strong market share
gains, best-in-class productivity and liability franchise and focus on cross-sell. The bank has
maintained its profitability during Q1FY21 as well. We believe HDFCB is poised to build on its
strong retail platform to improve its ROA on the back of rising cross-sell and productivity once
the COVID-related asset quality shocks. With growth capital in place, HDFC Bank can deliver
2% ROA over the medium-term on the back of sustained 20%+ loan growth.

Exhibit 25: ROE, ROA remain best-in-class Exhibit 26: Well capitalized for growth

2.4 24 20
1.4 1.3 1.4
1.5 1.5 1.3 1.3 1.3
1.8 18 15 1.8 1.9 1.6 1.7

(%)

(%)
(%)

1.2 12 10

0.6 6 5

13.3 13.6 13.3 13.1 15.6 15.8 15.8 15.6 16.2 17.1 17.2 17.5
0
0.0 0 2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20

2QFY20

3QFY20

1QFY21
4QFY20
FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21e

FY22e

ROA ROE (RHS) Tier I Tier II

Source: Company, SSLe

Changes in estimates
We revise our FY21 EPS estimates downward by 14%. The revision in estimates is driven
primarily by lower loan growth expectations, impact on fee income with lower retail business and
elevated credit costs to absorb COVID-19 related asset quality shocks. We introduce FY22
estimates as well.

Exhibit 27: Changes in estimates

Revised Old Change (%)

(Rs m n)
FY21e FY21e FY21e
Net interest income 649,287 692,839 (6.3)
Pre-provisioning profit 573,631 575,514 (0.3)
PAT 300,689 348,273 (13.7)
EPS (Rs) 54.8 63.9 (14.2)
BVPS (Rs) 353.5 359.4 (1.6)

Source: Company, SSLe

We value HDFC Bank using the SoTP approach. We value the bank at 3.3x Mar’22 core BVPS
to arrive at a TP of Rs1,275, while we value HDB Financial services (NBFC subsidiary) at 2.5x
Mar’22 BVPS and HDFC Securities at 15x FY22 EPS (at par with internal valuation of ICICI
Securities in ICICI Bank SOTP). Valuation premium for the core bank is justified by best-in-class
ROEs and consistent superior operating performance.

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 11

HDFC Bank SBICAP Securities Ltd

Exhibit 28: HDFC Bank’s SoTP-based TP

Value Value
% Stake Rs per Share % of TP Valuation Rationale
(Rs bn) (USD bn)
HDFC Bank 6,999 93.3 100.0 1,275 95.8 3.3x Mar'22 core BVPS
HDB Financial Services 242 3.2 95.3 42 3.2 2.5x Mar'22 BVPS
HDFC Securities 75 1.0 96.5 13 1.0 15x FY22e EPS
Total Value of Subsidiaries 318 4.2 55 4.2
Holding company discount 0
Subsidiaries value post discount 55
Target Price 1,330

Source: Company, SSLe

We reiterate BUY with SoTP-based TP of 1,330.

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 12

HDFC Bank SBICAP Securities Ltd

Financials (Standalone)
Incom e statem ent (Rs m n) FY18 FY19 FY20 FY21e FY22e Du Pont analysis (% of avg assets) FY18 FY19 FY20 FY21e FY22e

Net interest incom e 400,949 482,432 561,861 649,287 742,576 Net interest incom e 4.2 4.2 4.0 4.0 3.9

Interest income 802,414 989,721 1,148,126 1,317,914 1,525,055 Other incom e 1.6 1.5 1.7 1.6 1.6

Interest expenditure 401,465 507,288 586,264 668,627 782,479 Other income - core 1.5 1.5 1.5 1.4 1.4

Other income 152,203 176,258 232,608 258,034 299,615 Other income - treasury 0.1 0.0 0.1 0.2 0.1

Other income - core 142,956 172,390 213,264 229,681 271,898 Total incom e 5.7 5.7 5.7 5.6 5.5

Other income - treasury 9,247 3,868 19,344 28,354 27,718 Operating expenses 2.4 2.3 2.2 2.0 2.0

Operating expenses 226,904 261,194 306,975 333,690 368,456 Employee expenses 0.7 0.7 0.7 0.7 0.7

Employee expenses 68,057 77,618 95,257 109,669 125,042 Pre-provisioning profit 3.4 3.4 3.5 3.5 3.6

Pre-provisioning profit 326,248 397,497 487,494 573,631 673,736 Provisions 0.6 0.7 0.9 1.1 1.1

PBT 266,973 321,996 366,070 401,991 469,787 PBT 2.8 2.8 2.6 2.5 2.5

PAT 174,867 210,781 262,572 300,689 351,401 PAT 1.8 1.8 1.9 1.8 1.9

Balance sheet (Rs m n) FY18 FY19 FY20 FY21e FY22e Grow th ratios (%) FY18 FY19 FY20 FY21e FY22e

Net w orth 1,062,950 1,492,064 1,709,860 1,938,506 2,205,712 Net interest income 21.0 20.3 16.5 15.6 14.4

Deposits 7,887,706 9,231,409 11,475,023 13,100,988 15,785,963 Other income - core 23.8 15.8 32.0 10.9 16.1

Borrow ings 1,231,050 1,170,851 1,446,285 1,384,329 1,425,510 Pre-provisioning profit 26.8 21.8 22.6 17.7 17.5

Other liabilities 457,637 551,081 673,944 826,659 932,581 PAT 20.2 20.5 24.6 14.5 16.9

Total liabilities 10,639,343 12,445,405 15,305,113 17,250,481 20,349,766 EPS 18.7 14.9 23.7 14.5 16.9

Cash & bank balances 1,229,151 813,476 866,187 1,378,671 1,623,651 Netw orth 18.8 40.4 14.6 13.4 13.8

Advances 6,583,331 8,194,012 9,937,029 11,423,136 13,531,042 Deposits 22.5 17.0 24.3 14.2 20.5

Investments 2,422,002 2,905,879 3,918,267 3,642,686 4,276,654 CASA Deposits 11.0 14.0 23.9 14.9 19.4

Other assets 404,859 532,038 583,630 805,988 918,418 Advances 18.7 24.5 21.3 15.0 18.5

Total assets 10,639,343 12,445,405 15,305,113 17,250,481 20,349,766 Risk-w eighted assets (RWA) 25.0 16.5 6.7 13.9 17.1

Risk-w eighted assets 8,001,260 9,319,300 9,947,160 11,330,360 13,273,342 BVPS 17.3 33.8 13.8 13.4 13.8

Key m etrics FY18 FY19 FY20 FY21e FY22e Valuation ratios FY18 FY19 FY20 FY21e FY22e

CASA (%) 43.5 42.4 42.2 42.5 42.1 EPS (Rs) 67.4 77.4 47.9 54.8 64.1

Credit-deposit ratio (C/D ratio) (%) 83.5 88.8 86.6 87.2 85.7 BVPS (Rs) 409.6 547.9 311.8 353.5 402.3

Net interest margin (%) 4.35 4.36 4.22 4.17 4.14 ABVPS (Rs) 399.6 536.1 305.4 341.6 388.8

Cost-Income (C/I) (%) 41.0 39.7 38.6 36.8 35.4 DPS 15.7 15.0 9.5 10.9 12.8

Credit cost / loan(bps) 81.0 86.5 100.2 149.7 151.8 P/E (x) 32.6 28.4 23.0 20.1 17.2

Gross NPA (%) 1.3 1.4 1.3 2.1 2.2 P/BV (x) 5.4 4.0 3.5 3.1 2.7
Net NPA (%) 0.4 0.4 0.4 0.6 0.5 P/ABV (x) 5.5 4.1 3.6 3.2 2.8

Provision coverage (%) 69.8 71.4 72.0 72.9 75.7 Dividend yield (%) 1.4 1.4 0.9 1.0 1.2

CET 1 (%) 12.3 14.9 16.4 16.5 16.1

CRAR (%) 14.8 17.1 18.5 18.3 17.6

ROA (%) 1.8 1.8 1.9 1.8 1.9

ROE (%) 17.9 16.5 16.4 16.5 17.0

Source: Company, SSLe

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 13

HDFC Bank SBICAP Securities Ltd

Recommendation History
Date Stock Price TP Rec.
BUY HOLD SELL
5-Jun-17 816 875 BUY
Stock Price Target Price
1400 24-Jul-17 868 920 BUY
24-Oct-17 934 1,010 BUY
1200
19-Jan-18 976 1,010 BUY
20-Apr-18 980 1,072 BUY
(Rs)

1000
20-Jul-18 1,095 1,200 BUY
19-Oct-18 984 1,200 BUY
800
18-Jan-19 1,065 1,200 BUY

600 18-Apr-19 1,147 1,260 BUY

Jan-18

Jan-19

Jan-20
Jul-17

Jul-20
Jul-18

Jul-19

Nov-19
Sep-17
Nov-17

Mar-18

Sep-18
Nov-18

Sep-19
Mar-19

Mar-20
May-20
May-17

May-18

May-19
28-May-19 1,208 1,260 BUY
19-Jul-19 1,188 1,341 BUY
16-Aug-19 1,114 1,303 BUY
Source: Bloomberg, SSLe
18-Oct-19 1,229 1,314 BUY
17-Jan-20 1,278 1,314 BUY
17-Jul-20 1,098 1,330 BUY

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KEY TO INVESTMENT RATINGS

Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points);
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DISCLOSURES & DISCLAIMERS

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The views expressed in this research report (“Report”) accurately reflect the personal views of the research analysts (“Analysts”) employed by SBICAP
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The Analysts engaged in preparation of this Report or his/her relative:-
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The Analysts engaged in preparation of this Report:-
(a) have not received any compensation from the subject company in the past twelve months; (b) have not managed or co-managed public offering
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Name Qualification Designation Sector

Krishnan ASV B.Com (Hons.), PGDM (Finance) Lead Analyst BFSI
Deepak Shinde B.Tech, PGDM (Finance) Associate BFSI

krishnan.asv@sbicapsec.com I deepak.shinde@sbicapsec.com July 20, 2020 | 14

HDFC Bank SBICAP Securities Ltd
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