HDFC Bank
BSE SENSEX
34,047
S&P CNX
10,458
1 March 2018
Update
| Sector:
Financials
CMP: INR1,872
The juggernaut
TP: INR2,400(+28%)
Buy
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
HDFCB IN
2,563
2014 / 1369
0/-1/18
5,023
77.9
3318.0
79.0
Financials Snapshot (INR b)
2018E 2019E 2020E
Y/E Mar
NII
409.5 484.7 588.8
OP
328.9 395.5 490.2
NP
175.8 216.4 270.9
NIM (%)
4.6
4.5
4.5
EPS (INR)
67.0
80.6 100.9
EPS Gr. (%)
18.0
20.3
25.2
BV/Sh. (INR)
473.8 538.2 621.0
ABV/Sh. (INR)
450.0 511.9 591.6
RoE (%)
16.2
15.9
17.4
RoA (%)
1.8
1.9
2.0
Payout (%)
21.1
20.2
17.9
Valuations
P/E(X)
27.9
23.2
18.6
P/BV (X)
4.0
3.5
3.0
P/ABV (X)
4.2
3.7
3.2
Div. Yield (%)
0.8
0.9
1.0
Shareholding pattern (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
21.0
21.0
21.3
DII
12.2
11.6
12.4
FII
51.4
52.2
50.5
Others
15.4
15.1
15.9
FII Includes depository receipts
Stock Performance (1-year)
HDFC Bank
Sensex - Rebased
2,200
2,000
1,800
1,600
1,400
1,200
HDFC Bank (HDFCBK) has consistently grown its market share in loans and deposits across
credit cycles, and has emerged as the best-managed bank in India with robust
profitability/growth metrics. Increasing granularity of the balance sheet, a focus on fee
income growth, an improvement in operating leverage aided by digital initiatives, and
controlled credit costs backed by strong underwriting have enabled the bank to
outperform most peers. We expect the bank to maintain its growth momentum
(regardless of its systemic size) and further gain market share across business segments.
This, coupled with steady revenue growth, a continued improvement in operating
leverage and moderation in credit cost, will help accelerate earnings growth (24% CAGR
over FY18-20E). Moreover, its subsidiaries – HDB Financial Services and HDFC Securities –
are rapidly gaining scale and will further support valuations. We expect HDFCBK to
deliver RoA/RoE of 1.96%/17.4% in FY20E (RoE is suppressed as we have built in capital
raise of INR240b). We maintain our Buy rating with a target price of INR2,400.
Market share gains to continue; No size too big
Over the past 10 years, HDFCBK has steadily grown its loans/deposits market share
to ~7.8%/ 6.4% of the system, driven by steady branch addition (up 7x from 684 in
FY07 to 4,715 in FY17), improving employee productivity (business/employee
doubled over FY07-17), and effective use of technology to gain distribution
efficiency (cost-to-core income ratio decreased 840bp to 44.5% over FY07-17). The
bank has also recorded the highest incremental market share among peers. We
expect HDFCBK to continue gaining market share to reach 10% by FY22, driven by
robust growth in the vehicle portfolio, business banking and unsecured segments.
Retail loan growth remains strong; working diligently to expand the pie
HDFCBK has grown its retail book at a 27% CAGR over the past three years,
significantly ahead of systemic retail loan growth. Enhanced focus on rural and
semi-urban locations has helped the bank to gain strong traction in retail and SME
loans. SME loan growth has also received a boost from digitization of the
application process, which has reduced the turnaround time (TAT). While the share
of unsecured personal and credit card loans has increased, the bank’s credit
monitoring framework remains robust, helping it maintain strong control on
delinquency levels. The bank has 50%+ market share in the credit card business; it
targets to double its outstanding card base over the next three years.
Robust third-party and bancassurance fees are driving overall fee growth
HDFCBK has built a strong and well-diversified fee income profile over the years.
While fee income forms ~1.2% of average assets and ~23% of total income, the
contribution of third-party distribution to total fees has steadily increased to 16%
from 11% in FY14. This was driven by a 14% CAGR in third-party fees over FY12-17.
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 3982 5540
| Anirvan Sarkar
(Anirvan.Sarkar@MotilalOswal.com); +91 22 3982 5505
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415 |
Piran Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 3980 4393
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

HDFC Bank
Bancassurance income from HDFC Standard Life Insurance forms ~32% of HDFCBK’s
third-party distribution fees. HDFCBK continues to command >70% of total
commissions paid by HDFC Life, which, coupled with strong new business growth
trend for HDFC Life (43% growth over FY18YTD), provides visibility of robust fee
income from this channel.
Operating leverage continues to surprise positively; digital initiatives help
reduce sourcing costs
The bank has channelled its digital abilities to reduce involvement of manpower in
routine, process-driven operations, with an aim to enable employees to focus more
on business generation. Initiatives such as 10-second personal loans and pre-
approved auto loans have helped reduce sourcing costs, leading to a steady
improvement in cost-ratios. Over the past four years, the C/I ratio has improved by
450bp to 41%, and the cost-asset ratio by 31bp to 2.4%. We expect continued
operating leverage improvement (38.4% cost-income by FY20E), led by (i) controlled
employee/network growth, (ii) further improvement in branch productivity and (iii)
lower operating expenses due to increasing usage of technology.
Subsidiaries rapidly gaining scale; expected to add ~4.3% to valuations
Both HDB Financials and HDFC Securities have grown robustly over the last three
years. While HDB Financials reached AUM of INR352b by 1QFY18 (comparable to
CIFC), HDFC Securities recorded ~40% PAT CAGR over FY14-17, with its RoE
improving to a healthy level of 29%+ from 22% in FY16. We expect both the
subsidiaries to maintain strong growth trajectory over the next few years. At 25x
FY20E earnings for HDFC Securities and 3.5x FY20E BV for HDB Financials, the two
subsidiaries together would add INR103 to our TP, post hold-co discount of 20%.
Improvement in RoRWA underscores adequate pricing of risk; asset quality
risks well in control
Owing to stronger growth in the unsecured portfolio, the bank’s RWA has steadily
increased to 79% of total assets, indicating an increase in the risk profile. However,
we note that besides the improvement in RoA (40bp improvement over FY11-18),
the RoRWA of the bank has improved by ~30bp to ~2.5% during the same period.
This indicates that – (i) profitability has improved on the back of multiple levers
(higher fee income and lower opex) rather than simply taking on higher balance
sheet risk and (ii) the bank is able to adequately price the incremental risk it is taking
via robust growth in the unsecured portfolio. The delinquency trend in the
unsecured portfolio also remains well in control, given that >60% of credit card
loans and >50% of personal loans are disbursed to existing customers with a strong
credit history. HDFCBK’s focus in extending these products largely to salaried
customers also helps it in maintaining healthy asset quality.
Valuation view
We expect HDFCBK to record 23% loan book CAGR and 24% PAT CAGR over FY18-
20E, with RoA/RoE of 1.96%/17.4% in FY20E (RoE is suppressed as we have built in
capital raise of INR240b in our numbers). While margins may contract slightly due to
intensifying competition, its robust fee income profile and strong control on
operating leverage will continue driving a steady improvement in the return ratios
(12bp improvement in RoA over FY18-20E). We arrive at a target price of INR2,400
(3.9x Mar’20E ABV and INR103 for subs) and maintain our
Buy
rating.
1 March 2018
2

HDFC Bank
Market share gains to continue – No size too big!
HDFCBK has consistently grown its market share in loans and deposits across
credit cycles. The bank, thus, accounts for 7.8%/6.4% market share in
loans/deposits v/s 2.4%/2.6% ten years ago. It ranks at the top amongst private
players.
Market share expansion has accelerated over the past few years, led by
continued traction across several product segments – at a time when asset
quality pressures have been impacting growth for many of its large private
peers. The bank’s loan book is now 25% higher than the closest private peer
ICICI Bank, while the differential in the growth outlook will enable it to further
widen its lead over the next few years.
Exhibit 2: …while deposits market share has increased to
6.4%
Deposit market share
4.2 4.4
3.7 3.7 4.0
4.8
5.3
5.9 6.0
6.4
Exhibit 1: Loan market share has increased to 7.8% for the
bank
Credit market share
5.1
5.6
6.4
7.0
7.8
2.3 2.3 2.4 2.7
4.6
4.1 4.2
3.6 3.9
2.6 2.6
3.2
Exhibit 3: Among major new private banks, HDFCBK has
increased its advances market share to ~30%
HDFC Bank
ICICI Bank
Kotak Mahindra Bank
Axis Bank
Indusind Bank
YES Bank
Exhibit 4: …while deposits market share has increased to
6.4%
HDFC Bank
ICICI Bank
Kotak Mahindra Bank
Axis Bank
Indusind Bank
YES Bank
58.8
10.0
16.4
FY05
36.7
21.1
25.5
FY10
30.1
21.9
28.4
FY15
24.6
25.9
29.3
FY17
23.9
24.5
29.9
9MFY18
FY05
FY10
FY15
FY17
9MFY18
Source: MOSL, Company
Source: MOSL, Company
Exhibit 5: Strongest credit market share gain among peers…
HDFC Bank credit market share
ICICI Bank credit market share
Axis Bank credit market share
5.6
3.9
2.3
1.4
FY10
FY15
FY17
3QFY18
3.2
5.6 5.9
7.0
4.3
5.9
Exhibit 6: …as well as deposit market share
HDFC Bank deposit market share
ICICI Bank deposit market share
Axis Bank deposit market share
8.3
7.8
6.2
5.2
2.1
5.9
3.7
1.9
4.5
3.1
5.3
6.0
4.2
3.8
4.5
3.8
6.4
4.8
3.8
4.7
FY05
FY05
FY10
FY15
FY17
3QFY18
Source: MOSL, RBI, Company
Source: MOSL, RBI, Company
1 March 2018
3

HDFC Bank
While a few investors may have second thoughts on the long-term sustainability
of this growth momentum given the increasingly bigger size of the bank, we
believe that HDFCBK is well positioned to outgrow the system and further gain
market share regardless of its size. We thus
expect HDFCBK to attain 10%
market share by FY22
while systemic loan growth also revives modestly.
Instead of just eating up into the market share from other banks, mainly PSU
banks,
HDFCBK has been able to expand the credit pie, with expansion of its
network in sub-urban/rural geographies.
This has helped the bank in
maintaining uniform growth across its retail and wholesale segments – in retail
it is developing and capitalizing on new lending opportunities (given that PSU
banks have limited presence in this segment to gain from), while in wholesale it
is gaining market share both by way of refinancing and finding out fresh lending
opportunities.
Well positioned to further strengthen its leadership across
business segments
Auto loans to maintain healthy growth; used passenger vehicle mix gaining
share:
HDFCBK has grown its auto loan portfolio at a healthy 21% CAGR over the
past three years, led by healthy traction in car/CV and auto loans. This was well
supported by the increase in the share of used passenger vehicles, which now
forms ~15% of the total passenger vehicle portfolio.
The shift from the unorganized to organized segment
in the used PV market
and
the bank’s targeted efforts into NBFC-dominated deeper geographies
led
by its stronger branch network
are further enabling it to gain market share.
HDFCBK also aims to maintain strong growth trajectory in the CV portfolio.
However, it does not plan to target the small CV segment very aggressively yet,
as demand for MHCVs under the GST regime is likely to outpace that in lower
tonnage vehicles. The bank, thus, is closely watching the developments in this
segment, where some initial signs of strength are visible.
Exhibit 8: Vehicle finance has declined as % of total book
over the last few years
2 wheeler loans (% total loans)
CV loans (% total loans)
Car Loans (% total loans)
1.3
4.8
14.3
1.2
5.1
13.8
1.3
6.7
13.5
1.3
6.7
12.9
1.1
4.8
10.9
Exhibit 7: The bank has recorded robust growth in vehicles
book from FY16
Car Loans (% growth)
CV loans (% growth)
2 wheeler loans (% growth)
75.0
50.0
25.0
0.0
-25.0
1.1
3.5
11.1
1.2
3.2
10.8
1.1
3.5
11.2
1.2
3.4
11.6
Source: MOSL, Company
Source: MOSL, Company
1 March 2018
4

HDFC Bank
Unsecured portfolio to maintain growth momentum; asset quality trends
remain strong:
HDFCBK has delivered 39%/30% CAGR in the personal
loans/credit card segments over the past three years. The share of unsecured
loans in the total retail portfolio has thus increased 520bp over the past three
years to reach ~30% (~16% of total loans).
Exhibit 9: Personal and credit card loans have recorded robust growth in last few years
Personal loans (% growth)
42.8
26.7
45.3
31.8
35.2
26.0
17.7
FY11
FY12
FY13
16.6
FY14
FY15
FY16
FY17
9MFY18
21.2
26.5
27.0
26.7
29.3
Credit Cards (% growth)
44.1
34.6
33.5
Source: MOSL, Company
Credit cards – HDFCBK currently accounts for 29% of the total credit card
market by both 9MFY18 POS transaction volume and transaction amount.
This
enables the bank to tie-up with multiple retail partners/brands and e-commerce
companies, and offer attractive promotional schemes on purchases via its credit
cards (e.g. cash backs on Apple i-phone purchase and discounts on purchase
from Vijay Sales). This helps the bank in stepping up the customer acquisition
run-rate and gain further market share.
1 March 2018
5

HDFC Bank
Exhibit 10: Multiple tie-ups with retailers (both ecommerce sites and physical stores) drive credit card portfolio growth
Source: MOSL, Company
1 March 2018
6

HDFC Bank
Exhibit 11: Tie-ups with retailers and e-commerce sites help improve HDFCBK’s credit card proposition and boost customer
acquisition run-rate
Source: MOSL, Company
Credit card customers currently comprise ~25% of the bank’s 42m customer
base. Management aims to increase this penetration to ~50% of its current
customer base over the next three years, even as it is witnessing steady growth
in customer accounts every year. Thus, even as HDFCBK accounts for 29%/50%+
of the total credit card industry by number of cards/credit outstanding, it is still
very well placed to double its card base over the next three years.
1 March 2018
7

HDFC Bank
Exhibit 12: HDFCBK has 29% of outstanding credit cards in the system…
9MFY18
AXIS BANK
HDFC BANK
ICICI BANK
INDUSIND BANK
KOTAK MAHINDRA BANK
YES BANK
Grand Total
Cards
No of POS
outstanding (m) transactions (m)
4.0
10.0
4.6
0.7
1.3
0.2
34.8
93.0
296.8
140.4
19.3
25.2
4.6
1,033.1
Amount of POS
transactions (INRb)
309.2
961.4
375.3
110.5
75.7
12.4
3,355.5
Average ticket
size (INR'000)
3,324.0
3,239.1
2,673.6
5,728.7
3,001.5
2,730.5
3,248.0
Source: MOSL, RBI, Company
Exhibit 13: …and accounts for 50%+ of systemic credit card outstanding, thus pointing
toward higher transactional market share
Share of credit
cards (%)
Axis Bank
HDFC Bank
ICICI Bank
IndusInd Bank
11.7
28.7
13.3
2.1
Credit card loans
outstanding (INR b)
77.3
336.2
90.4
23.5
Share of system level
credit card loans (%)
12.0
52.4
14.1
3.7
Source: Company, RBI, MOSL
The bank intends to continue maintaining robust growth in both credit cards
and personal loans segments, and is not overly worried about the increase in
the unsecured proportion of its loan book. HDFCB highlighted that the
delinquency trend in the unsecured portfolio remains well in control, given that
>60% of credit card loans and >50% of personal loans are disbursed to existing
customers with a strong credit history. HDFCBK’s focus on extending these
unsecured products largely to salaried customers also helps it in maintaining
healthy asset quality.
HDFCBK has recently
increased bulk TD rates to
match retail TD rates with
an aim attract more
deposits
Time-tested growth strategy will help maintain stable margins
HDFCBK has judiciously shaped its asset growth strategy in sync with the built up of
its liability portfolio. Post demonetization, the bank reported a few quarters of
higher-than-usual corporate book growth, as it utilized the excess liquidity and the
low cost of funds environment in building a lower-yield corporate book.
Exhibit 14: Corporate loan growth picked up post demonetization
Retail loans (% growth)
9.9
9.2
1.1
5.1
3.5
4.3
-1.2
Corporate loans (% growth)
15.8
8.6
4.0
8.3
1.9
3.4
8.6
2.7
-3.3
6.8
7.1
0.9
4.6
4.0
8.3
Source: Company, MOSL
1 March 2018
8

HDFC Bank
However, with tightening of the rate environment and continued weakness in
deposit growth, the bank is focusing more on high-yield retail book. HDFCBK has
recognized that growth from here may not be met by deposit accretion alone and
that it might need to raise borrowings to bolster its funding base. The bank has also
recently increased bulk deposit rates in order to boost deposit growth, even as total
retail deposits still form ~95% of its total SA+term deposit mix. The bank believes
that the interest rate cycle has bottomed out, and has recently increased MCLR in
order to offset the pressure on funding cost. We estimate HDFCBK to maintain
stable margins over FY18-20E.
Exhibit 15: Every major private bank (except ICICI Bank) has increased MCLR in February
2018
Bank
Tenure
One month
Three months
HDFC Bank
Six months
One year
One month
Three months
ICICI Bank
Six months
One year
One month
Three months
Axis Bank
Six months
One year
One month
Three months
Kotak Bank
Six months
One year
One month
Three months
IndusInd Bank
Six months
One year
One month
Three months
Yes Bank
Six months
One year
Apr'17
7.85%
7.90%
7.95%
8.15%
7.85%
7.90%
8.15%
8.20%
7.90%
8.05%
8.15%
8.25%
8.10%
8.25%
8.50%
8.80%
8.45%
8.75%
9.00%
9.10%
8.20%
8.45%
8.60%
8.80%
Sep'17
7.85%
7.90%
7.95%
8.15%
7.85%
7.90%
8.15%
8.20%
7.80%
8.00%
8.15%
8.25%
7.70%
8.10%
8.30%
8.60%
8.35%
8.65%
8.90%
8.95%
7.95%
8.30%
8.50%
8.80%
Jan'18
7.80%
7.85%
7.90%
8.10%
7.80%
7.85%
8.15%
8.20%
7.85%
8.05%
8.20%
8.30%
7.85%
8.15%
8.35%
8.65%
8.35%
8.65%
8.90%
8.95%
8.05%
8.35%
8.65%
8.95%
Feb'18
7.80%
7.85%
8.00%
8.20%
7.80%
7.85%
8.15%
8.20%
7.85%
8.15%
8.30%
8.40%
8.00%
8.35%
8.45%
8.65%
8.50%
8.80%
9.05%
9.10%
8.25%
8.65%
8.95%
9.15%
Source: MOSL, Company
1 March 2018
9

HDFC Bank
Strong fee income trend to continue; Third-party
distribution and bancassurance to keep growth buoyant
HDFCBK has built a strong and well-diversified fee income profile over the years.
While fee income forms ~1.2% of average assets and ~23% of total income, the
contribution of third-party distribution to total fee income has steadily increased to
16% from 11% in FY14 as the same reported 31% CAGR over past three years.
Exhibit 16: Contribution of third-party distribution fees to
total fee income has increased steadily
Third party distribution % of fee income
17
15
11
15
14
16
Exhibit 17: Bancassurance remains the dominant channel for
sourcing new business for HDFC Life
Individual NBP through Banca channel (%)
69.6
FY12
FY13
FY14
FY15
FY16
FY17
FY13
65.3
FY14
67.0
FY15
68.1
FY16
61.1
FY17
Source: MOSL, Company
Source: MOSL, Company
Bancassurance income from HDFC Standard Life Insurance forms a significant
portion (~32%) of HDFCBK’s third-party distribution fees. For HDFC Life, the
bancassurance channel has been a key growth driver and it generates the largest
proportion of Individual New Business Premium (NBP) (61% for FY17).
While HDFC Life has multiple bancassurance partners (HDFC Bank, RBL Bank, IDFC
Bank etc.), the sourcing share of HDFCBK remains highest, and this translates into
healthy commissions paid by HDFC Life to HDFCBK. We observe that HDFCBK
continues to command >70% of total commissions paid by HDFC Life. This, coupled
with the strong new business growth trend for HDFC Life (>40% over FY18YTD),
provides visibility of robust fee income from this channel for the bank.
Exhibit 18: HDFCBK has 70%+ share of total commissions paid by HDFC Life
Banca income from HDFC Life
73.0
72.8
HDFC Bank's total share of commissions
75.4
71.6
65.5
4.7
FY13
3.4
FY14
4.5
FY15
5.3
FY16
5.7
FY17
Source: MOSL, Company
1 March 2018
10

HDFC Bank
Operating leverage continues to surprise positively;
digitization has helped reduce sourcing cost
HDFCBK has reported a steady improvement in operating costs, which enabled it
to maintain healthy earnings growth. Over the past four years, the C/I and cost-
asset ratios have thus improved by 450bp and 31bp to current levels of 41% and
2.4%, respectively.
We expect a continued improvement in operating leverage
as (i) employee/network growth remains controlled, (ii) branch productivity
improves further, and most importantly, (iii) usage of technology further
drives down expenses.
HDFCBK’s opex strategy is centred around
(a) increasing operating efficiency
(evident from an increase in business/employee from INR88m in FY14 to
INR129m in FY17), (b) maintaining controlled branch expansion (added 179
branches over past one year) while the employee count has remained flat, (c)
efficient use of digital technology, thereby raising customer convenience and
ease and (d) competing against disruptive technology.
Process automation has helped reduce sourcing costs:
HDFCBK pioneered the
concept of online personal loans and has been witnessing strong traction in 10-
second personal loans, as against the usual turnaround time of three days.
Digital channels, thus, account for ~30% of incremental personal loans, ~10%
disbursement share via preapproved online auto loans and ~10% of Amazon’s
volumes through SmartBuy.
Exhibit 19: Share of digital channels in sourcing loans has increased significantly
Source: MOSL, Company
Most of the disbursements through this channel are to HDFCBK’s existing
customer base, whose account transaction history is recorded in the bank’s
database and thus can be quickly accessed for credit appraisal. Thus, in effect,
there is no dilution in underwriting stands while achieving higher efficiency
through the digital channel. The bank has used similar automation in other
products such as auto and SME loans, and has achieved similar reduction in
sourcing costs.
11
1 March 2018

HDFC Bank
Replacement of human labor for routine processes:
Online sourcing and
increasing use of technology have enabled the bank to reduce the expenses on
logistics and manpower (office boys who travel to customer locations, as well as
personnel in operations and sanctioning functions). The bank is aiming to use
artificial intelligence/robotics for routine work at its branches, which will further
help control opex and support return ratios.
Exhibit 21: Branch and employee addition have slowed
down while productivity gains are likely to continue
Change in headcount
Branches added in the last 3 years
1,470
1,417
2,989
8,935
1,458
9,555
1,312
-3,230
Exhibit 20: Cost-income and cost-to-assets ratio will
continue to trend lower
Cost-Income (%)
3.2 3.1 3.0 3.0
Cost-Assets (%)
47.9 48.8 50.6 51.4 45.7 44.9
44.4 41.8
40.4 41.0 40.1 38.4
2.7 2.6 2.6
2.5 2.6 2.4 2.3
2.2
Source: MOSL, Company
Source: MOSL, Company
Exhibit 22: Key digital offerings of the bank
Chillr
Smartbuy
PayZapp
Mobile Banking App
An app that lets customers
send money immediately to
anyone in their phone book,
24x7
Can also send money without
sharing mobile numbers with
Chillr App users in the
vicinity, using 'Near Me'
option
SmartBuy is a marketplace /
platform, that has tied up
with various merchants, for
display of offers extended by
merchants to HDFC Bank's
debit / credit card customers
HDFC Bank facilitates the
payment by its customers by
providing the Payment
Gateway Services and does
not earn any fee by hosting
this website
A complete payment
solution, giving customers the
power to pay in just One
Click.
One can shop on mobile at
partner apps, buy movie
tickets, music and groceries,
compare and book flight
tickets and hotels, shop
online, send money to
anyone in the contact list, pay
bills and recharge mobile,
DTH and data card.
HDFC Bank MobileBanking
App helps check account
balance, transfer funds, pay
bills, etc.
One can access
75+transactions
anytime/anywhere using the
app.
Recharge your mobile, DTH
and data cards
Immediate transfer money
between bank accounts
Source: MOSL, Company
1 March 2018
12

HDFC Bank
Exhibit 23: Branches with less than 3 years vintage have
decreased in absolute numbers…
Exhibit 24: …and as % of outstanding branches
1,041
1,225
1,337
1,132
1,417 1,470 1,458
1,312
1,075
60.3
61.7
44.5
43.7
41.6
36.6
32.3
27.8
22.7
Source: MOSL, Company
Source: MOSL, Company
Exhibit 25: Business per branch has improved consistently -
INRb
HDFC Bank
Kotak Bank
Axis Bank
IndusInd Bank
2.5
ICICI Bank
2.8
2.0 2.0
2.1 2.1
Exhibit 26: …as has business per employee, INRm
HDFC Bank
Axis Bank
ICICI Bank
IndusInd Bank
142
81
88
97
87
105 105
115 108
109
2.2
2.02.0
1.9 1.8
1.92.0 1.8 1.9
1.8
1.8 1.9
2.3 2.3
FY13
2.1 -
FY14
2.3 2.1
FY15
2.4 1.9
FY16
2.4 2.1
FY17
2.3 2.5
3QFY18
119
FY13
84
120
FY14
79
143
FY15
74
139
FY16
77
139
FY17
87
Source: MOSL, Company
Source: MOSL, Company
1 March 2018
13

HDFC Bank
Subsidiaries are rapidly gaining scale; expect growth momentum
to continue
Both subsidiaries of HDFC Bank – HDB Financials (96.2% ownership) and HDFC
Securities (97.9% ownership) – have shown robust growth over the past few years.
HDB Financials
has reached AUM of INR338b at the end of FY17 (comparable to
CIFC) and has been delivering healthy return ratios. Over the past five years, the
company has delivered 68%/53% growth in net earnings/AUMs. In FY17, the
company reported RoA/RoE of 2.3%/15.3%. HDB Financial is well capitalized,
with Tier I/CAR of 15.3%/20.8%, as against regulatory requirement of 15% CAR.
We expect this subsidiary to gain further scale over the near term with adequate
capital support from HDFCBK.
HDFC Securities
has grown its PAT at 16% CAGR over FY10-17. However,
revenue/earnings growth has picked up over the past few years, aided by rising
share of financial savings and increasing formalization of the economy. HDFC
Securities has expanded its presence from 194 branches in 150 cities in FY13, to
273 branches across 190 cities in FY17. The company reported 40% CAGR in its
net profit over FY14-17, while FY17 RoE expanded to ~29% v/s 22% in FY16.
With an improvement in operating leverage, steady growth in new customer
additions and buoyant markets, we expect the company to report a strong
earnings trend over the next few years.
We, thus, expect both the subsidiaries to maintain strong growth trajectory and
do not envisage the bank to monetize these stakes over the near term. At 15x
FY20E earnings for HDFC Securities and 3x FY20E BV for HDB Financials, together
these subsidiaries add INR103 to our TP, post hold-co discount of 20%.
Exhibit 27: HDB Financials has recorded 42% AUM CAGR
over FY13-17
AUM (INRb)
Exhibit 28: …while PAT has grown at 61% CAGR over the
same period
PAT (INRb)
42% CAGR
61% CAGR
82.5
FY13
135.6
FY14
192.9
FY15
259.1
FY16
337.9
FY17
350.0
3QFY18
1.0
FY13
2.1
FY14
3.5
FY15
5.3
FY16
6.8
FY17
Source: MOSL, Company
Source: MOSL, Company
1 March 2018
14

HDFC Bank
Exhibit 29: RoA/RoE continues to be healthy for HDB while…
RoA
RoE
1.9
1.6
16.7
12.5
14.7
16.0
15.3
42
2.1
2.4
2.3
48
Exhibit 30: …asset quality has remained pristine
Net NPA (bps)
73
85
FY13
FY14
FY15
FY16
FY17
FY14
FY15
FY16
FY17
Source: MOSL, Company
Source: MOSL, Company
Exhibit 31: HDFC Sec has recorded 34% CAGR over FY13-17…
PAT
2.2
Exhibit 32: …RoE has expanded sharply in FY17
RoE
32.6
21.6
29.3
34% CAGR
0.8
1.6
19.8
1.3
19.3
0.7
FY13
FY14
FY15
FY16
FY17
FY13
FY14
FY15
FY16
FY17
Source: MOSL, Company
Source: MOSL, Company
Exhibit 33: HDFC Securities features among the top 5 in terms of brokerage revenues….
Brokerage revenue (INR m)
ICICI Securities
Kotak Securities
Motilal Oswal
India Infoline
HDFC Securities
Others
Total
nd
FY14
4,960
3,439
2,648
3,233
2,039
66,424
82,743
FY15
7,554
5,917
4,449
4,726
3,374
1,01,608
1,27,628
FY16
6,607
5,719
4,510
4,254
3,116
92,862
1,17,068
FY17
7,759
7,424
5,516
4,412
4,211
1,10,478
1,39,800
Source: MOSL, Company
Exhibit 34: …while being the 2 in terms of active clients on NSE
Active clients on NSE, (‘000)
ICICI Securities Limited
HDFC Securities Ltd.
Sharekhan Ltd.
Axis Securities Ltd.
Kotak Securities Ltd.
Others
FY14
501
279
275
77
223
2,933
FY15
595
348
343
120
268
3,418
FY16
560
408
336
184
247
3,434
FY17
618
483
366
259
274
3,950
2QFY18
693
508
435
321
312
4,616
Source: MOSL, Company
Exhibit 35: Comparison of PAT across brokerages
PAT (INRb)
HDFC Sec
ICICI Sec
Axis Sec
FY14
0.8
0.9
0.1
FY15
1.6
2.9
0.4
FY16
FY17
1.3
2.2
2.4
3.4
0.4
0.5
Source: Company, MOSL
1 March 2018
15

HDFC Bank
Improvement in RoRWA underscores adequate pricing of risk;
asset quality risks well in control
Over the last three years, HDFCBK’s retail loan mix has evolved in favor of
unsecured products, with robust growth in the credit cards portfolio and
unsecured personal loans, which have increased from ~18% of the retail book in
FY14 to ~23% currently.
However, growth in the unsecured credit card and personal loans segment does
not have a linear correlation with the bank’s risk profile, in our view. This is
because a significant part (60-65%) of credit cards is sold to existing customers
post appraisal of their credit history. Also, the bank has witnessed a low
revolving rate from credit card customers, which implies a smaller customer
base paying interest on card purchases, and thus, bringing the risk of turning
delinquent. The bank’s focus is on earning fee rather than interest income from
its cards business. The bank manages risk in its personal loans segment in a
similar way as 50-55% of PL loans are disbursed to existing customers.
Over FY10-17, the bank’s RWA increased from 69.7% to 74.1% of total assets,
indicating an increase in the risk profile. However, we note that, over the long
term, besides the improvement in RoA (+40bp over FY11-18), the RoRWA of the
bank has also improved by ~30bp to ~2.5% during the same period. This
indicates that – (i)
profitability has improved on the back of multiple levers
(higher fee income and lower opex) rather than
simply on higher balance sheet
risk
and (ii) the bank is able to adequately price the incremental risk it is taking
in the unsecured portfolio, and earn higher return on the same.
Exhibit 37: Share of low-cost digital channels is going up
Internet and mobile
85.0
80.0
75.0
70.0
65.0
60.0
40
43
14
51
23
10
16
40
19
12
29
25
15
5
55
21
12
4
15
11
3
8
10
2
Phone banking
Branches
ATM
Exhibit 36: RoRWA has increased at the same pace as RoA
RoRWA
3.3
2.8
2.3
1.8
1.3
0.8
RoA
RWA/Assets
63
71
80
Source: MOSL, Company
Source: MOSL, Company
We expect HDFCBK’s RoA to improve by ~12bp over FY18-20, aided by steady
revenue growth and moderation in credit costs. We note that, in 9MFY18 YTD, the
operating profit of the bank has grown at faster 29% YoY; however, elevated
provisioning expenses (more on account of supervisory review and agri loan waivers
than towards unsecured portfolio) have resulted in stable 20% YoY growth in net
profit.
We expect credit cost to moderate by ~10bp over FY18-20, while stable revenue
growth, continued buoyancy in fee income and controlled opex should drive healthy
growth in net profit. We, thus, expect HDFCBK to deliver 24% earnings CAGR over
FY18-20E, as against its FY14-18E average profit growth of ~20%.
1 March 2018
16

HDFC Bank
Exhibit 38: PPoP to RWA has held strong even in periods of RoRWA decline
PPoP to average assets
5.0
4.0
3.0
2.0
1.0
0.0
PPoP to average RWA
RWA/Assets
85.0
80.0
75.0
70.0
65.0
60.0
Source: MOSL, Company
Exhibit 39: DuPont Analysis for HDFCBK – operating leverage continues to boost profitability
Y/E March
Interest Income
Interest Expended
Net Interest Income
Core Fee Income
Trading and others
Non Interest income
Total Income
Operating Expenses
Employee cost
Others
Operating Profits
Core operating Profits
Provisions
NPA
Others
PBT
Tax
RoA
Leverage (x)
RoE
FY13
9.5
5.2
4.28
1.34
0.51
1.86
5.63
3.04
1.07
1.97
3.10
2.58
0.45
0.33
0.12
2.64
0.82
1.82
11.2
20.3
FY14
9.2
5.1
4.14
1.30
0.48
1.78
5.44
2.70
0.94
1.76
3.22
2.74
0.36
0.37
-0.01
2.86
0.96
1.90
11.2
21.3
FY15
9.0
4.8
4.14
1.23
0.43
1.66
5.37
2.59
0.88
1.71
3.22
2.79
0.38
0.32
0.07
2.83
0.94
1.89
10.3
19.4
FY16
9.3
5.0
4.25
1.23
0.43
1.65
5.48
2.61
0.88
1.74
3.29
2.86
0.42
0.33
0.09
2.87
0.98
1.89
9.6
18.3
FY17
8.8
4.6
4.21
1.12
0.44
1.56
5.33
2.51
0.82
1.68
3.27
2.83
0.46
0.40
0.06
2.82
0.97
1.85
9.7
17.9
FY18E
8.5
4.3
4.30
1.19
0.35
1.55
5.84
2.39
0.76
1.63
3.45
3.10
0.63
0.53
0.11
2.82
0.97
1.84
8.8
16.2
FY19E
8.3
4.1
4.22
1.21
0.32
1.53
5.75
2.31
0.72
1.59
3.45
3.12
0.57
0.52
0.04
2.88
0.99
1.89
8.4
15.9
FY20E
8.2
4.1
4.26
1.17
0.33
1.50
5.76
2.21
0.68
1.53
3.55
3.22
0.55
0.50
0.05
2.99
1.03
1.96
8.9
17.4
Source: MOSL, Company
1 March 2018
17

HDFC Bank
Valuation and view
Long-term industry view:
Bank credit growth has slowed down over the last three
years, with the muted demand environment tapering off greenfield investments in
core industries. However, utilization levels are expected to pick up from here,
leading to capex cycle revival, while retail demand should remain strong due to
rising income/consumption levels and the GoI’s initiatives toward housing and
agriculture growth. RBI-led time-bound balance sheet clean-up of large-ticket
stressed assets and capital infusion by the GoI will help banks to ride this leg of
growth, as they should be sufficiently capitalized for growth post providing for stress
on their books.
HDFCBK against that industry backdrop
Strong balance sheet traction expected to accelerate with capital raise:
In a
slow credit environment and on a high asset base, HDFCBK has increased its
credit market share from 5.4% in FY15 to 7.8% in 3QFY18 to become the largest
private sector bank in India while maintaining pristine asset quality. With its
recent capital raise of INR240b, the bank is expected to accelerate balance sheet
growth from here and continue gaining market share in both assets and
liabilities.
Continued operational efficiency to help maintain profitability:
HDFCBK has
continuously used digitization to reduce operating expenses and increase cross-
sell of fee products, helping improve operating leverage and RoA/RoE.
Continued digital initiatives are expected to drive further improvement in
operating leverage and help improve profitability as the bank focuses on the
next phase of growth.
We expect HDFCBK to record 23% loan book CAGR and 24% PAT CAGR over FY18-20,
with RoA/RoE of 1.96%/17.4% in FY20 (RoE is suppressed as we have built in capital
raise of INR240b in our numbers). While margins may see a slight contraction due to
intensifying competition, its robust fee income profile and strong control on
operating leverage will continue driving a steady improvement in the return ratios
(12bp improvement in RoA over FY18-20E).
Valuation view:
We arrive at a target price of INR2,400 for the bank (3.9x Mar’20E
ABV for standalone bank and INR103 for the subs) and maintain
Buy.
1 March 2018
18

HDFC Bank
Financials and Valuations
Income Statement
Y/E March
Interest Income
Interest Expense
Net Interest Income
Change (%)
Non Interest Income
Total Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Core PPP
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
PAT
Change (%)
2013
350,649
192,538
158,111
22.7
68,526
226,637
21.4
112,361
114,276
21.7
97,607
22.9
16,770
97,506
30,249
31.0
67,257
30.2
2014
411,355
226,529
184,826
16.9
79,196
264,023
16.5
120,422
143,601
25.7
122,227
25.2
15,880
127,721
42,937
33.6
84,784
26.1
2015
484,699
260,742
223,957
21.2
89,964
313,920
18.9
139,875
174,045
21.2
150,348
23.0
20,758
153,287
51,128
33.4
102,159
20.5
2016
602,214
326,299
275,915
23.2
107,517
383,432
22.1
169,797
213,635
22.7
184,470
22.7
27,256
186,379
63,417
34.0
122,962
20.4
2017
693,060
361,667
331,392
20.1
122,965
454,357
18.5
197,033
257,324
20.4
220,859
19.7
35,933
221,391
75,894
34.3
145,496
18.3
2018E
810,000
400,502
409,498
23.6
147,558
557,056
22.6
228,147
328,909
27.8
309,259
40.0
60,500
268,409
92,601
34.5
175,808
20.8
2019E
962,640
477,898
484,742
18.4
175,594
660,336
18.5
264,788
395,548
20.3
371,931
20.3
65,137
330,411
113,992
34.5
216,419
23.1
(INR Million)
2020E
1,158,776
569,949
588,828
21.5
207,201
796,029
20.5
305,797
490,232
23.9
461,631
24.1
76,596
413,636
142,704
34.5
270,931
25.2
Balance Sheet
Y/E March
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
of which CASA Dep
Change (%)
Borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Change (%)
Loans
Change (%)
Fixed Assets
Other Assets
Total Assets
2013
4,759
357,383
362,141
2,962,470
20.1
1,405,215
17.7
330,066
348,642
4,003,319
272,802
1,116,136
14.5
2,397,206
22.7
27,031
190,144
4,003,319
2014
4,798
429,988
434,786
3,673,375
24.0
1,646,214
17.2
394,390
413,444
4,915,995
395,836
1,209,511
8.4
3,030,003
26.4
29,399
251,246
4,915,995
2015
5,013
615,081
620,094
4,507,956
22.7
1,984,921
20.6
452,136
324,845
5,905,031
363,315
1,516,418
25.4
3,654,950
20.6
31,217
339,131
5,905,031
2016
5,056
721,721
726,778
5,464,242
21.2
2,363,108
19.1
849,690
367,251
7,407,961
389,188
1,958,363
29.1
4,645,940
27.1
33,432
381,038
7,407,961
2017
2018E
2019E
5,125
5,371
5,371
855,571 1,267,161 1,439,943
860,696 1,272,286 1,445,068
6,436,397 7,479,093 8,930,037
17.8
16.2
19.4
3,091,525 3,335,675 4,063,167
30.8
7.9
21.8
740,289
976,769 1,296,400
601,020
697,525
857,955
8,638,402 10,425,918 12,529,706
489,521
642,645
777,209
2,144,633 2,463,715 2,704,326
9.5
14.9
9.8
5,545,682 6,738,004 8,341,649
19.4
21.5
23.8
36,267
39,531
43,089
422,298
542,022
663,433
8,638,402 10,425,918 12,529,706
2020E
5,371
1,662,389
1,667,514
10,644,604
19.2
4,992,319
22.9
1,747,754
1,055,285
15,115,403
941,819
3,092,901
14.4
10,218,519
22.5
46,967
815,196
15,115,403
Asset Quality
Y/E March
GNPA (INR m)
NNPA (INR m)
GNPA Ratio
NNPA Ratio
Slippage Ratio
Credit Cost
PCR (Excl Tech. write off)
E: MOSL Estimates
2013
23,346
4,690
1.0
0.2
1.61
0.57
79.9
2014
29,893
8,200
1.0
0.3
1.93
0.60
72.6
2015
34,384
8,963
0.9
0.2
1.58
0.52
73.9
2016
43,928
13,204
0.9
0.3
1.56
0.51
69.9
2017
58,857
18,440
1.1
0.3
1.53
0.62
68.7
2018E
86,626
28,404
1.3
0.4
1.65
0.95
67.2
2019E
99,542
31,391
1.2
0.4
1.55
0.85
68.5
2020E
114,316
33,788
1.1
0.3
1.50
0.82
70.4
1 March 2018
19

HDFC Bank
Financials and Valuations
Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Yield on Invt
Avg. Cost-Int. Bear. Liab.
Avg. Cost of Deposits
Interest Spread
Net Interest Margin
Capitalization Ratios (%)
CAR
Tier I
Tier II
Asset-Liability Profile (%)
Loans/Deposit
CASA Ratio
Cost/Assets
Cost/Total Income
Cost/Core Income
Int. Expense/Int.Income
Fee Income/Total Income
Non Int. Inc./Total Income
Empl. Cost/Total Expense
Investment/Deposit
2013
10.6
12.3
7.5
6.4
6.0
4.2
4.8
2014
10.3
11.7
7.8
6.2
5.7
4.1
4.6
2015
10.1
11.1
7.2
5.8
5.7
4.3
4.6
2016
10.1
10.8
8.1
5.8
5.9
4.3
4.6
2017
9.6
10.2
7.8
5.4
5.3
4.2
4.6
2018E
9.4
10.2
7.9
5.1
5.1
4.3
4.6
2019E
9.3
10.1
7.7
5.1
5.1
4.2
4.5
2020E
9.3
10.1
7.7
5.0
5.0
4.3
4.5
16.8
11.1
5.7
16.1
11.8
4.3
16.8
13.7
3.1
15.5
13.2
2.3
14.6
12.8
1.8
20.0
15.3
4.7
20.5
14.0
6.5
20.4
13.0
7.5
80.9
47.4
2.8
49.6
49.9
54.9
27.3
30.2
35.3
37.7
82.5
44.8
2.4
45.6
45.8
55.1
27.2
30.0
34.7
32.9
81.1
44.0
2.4
44.6
47.0
53.8
24.4
28.7
34.0
33.6
85.0
43.2
2.3
44.3
46.7
54.2
23.6
28.0
33.6
35.8
86.2
48.0
2.3
43.4
45.8
52.2
21.8
27.1
32.9
33.3
90.1
44.6
2.2
41.0
42.5
49.4
20.4
26.5
31.8
32.9
93.4
45.5
2.1
40.1
41.6
49.6
21.0
26.6
31.3
30.3
96.0
46.9
2.0
38.4
39.8
49.2
20.3
26.0
30.7
29.1
Valuation
RoE
RoA
RoRWA
Book Value (INR)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Change (%)
Price-Earnings (x)
Dividend Per Sh (INR)
Dividend Yield (%)
E: MOSL Estimates
20.3
1.8
2.5
152
19.4
151
28.3
28.4
5.5
21.3
1.9
2.6
181
19.2
179
35.3
25.0
6.9
19.4
1.9
2.7
247
36.5
245
40.8
15.3
8.0
18.3
1.8
2.5
287
16.2
284
48.6
19.3
9.5
17.9
1.8
2.4
336
16.9
5.6
331
5.7
56.8
16.7
33.0
11.0
0.6
16.2
1.8
2.5
474
41.1
4.0
450
4.2
67.0
18.0
27.9
14.1
0.7
15.9
1.9
2.5
538
13.6
3.5
512
3.7
80.6
20.3
23.2
16.2
0.9
17.4
2.0
2.5
621
15.4
3.0
592
3.2
100.9
25.2
18.6
18.1
1.0
1 March 2018
20

HDFC Bank
NOTES
1 March 2018
21

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
HDFC Bank
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
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Analyst ownership of the stock
HDFC Bank
No
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1 March 2018
22