29 June 2020
Annual Report Update | Sector: Financials
CMP: INR1,076 TP: INR1,250 (+17%)
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RoRWA expansion underscores inherently strong profitability
Higher ESOP grant to retain talent; CEO’s transition remains key event
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
5909.7 / 76.7
1304 / 739
Financials Snapshot (INR b)
EPS Gr. (%)
Div. Yield (%)
HDFCB’s Annual Report underscores structural improvement in the bank’s
profitability, driven by a 20bp increase in RoRWA, higher than a 7bp improvement
witnessed in RoA. For FY20, NII/PPoP grew by 17%/23% while PAT grew by 25% YoY
to INR263b with the bank reporting a RoE of 16.4%.
The bank has gained market share across multiple digital channels, with 17% market
share in POS terminals, ~8%/~29% share in debit/credit card spend, and a credit
card base of 14.5m (25.1% share). ~95% of transactions happen digitally, owing to
which the bank has shown continuous improvement in its cost ratios.
On the asset quality front, agri slippages stood elevated and segmental GNPA in the
priority sector increased to 4.3% v/s 1.3% for the bank. The bank further witnessed
a GNPA increase in the Services segment at 1.4% v/s 1.1% in FY19. Furthermore, the
concentration of the top four NPA accounts increased to ~10% v/s 6.5% in FY19.
In FY20, RWA density improved 560bp, driven by a reduction in risk weights on
personal loans (to 100% from 125%) and focused lending to better rated
corporate/retail customers. The concentration of the top 20 advances increased
100bp to 11.6% on higher growth in wholesale assets, and the concentration of the
top 20 depositors improved ~210bp to 4%.
We note that attrition among the top employees (salaries of >INR10m) has
increased over the past two years, with ~10% of such employees leaving the bank in
FY20 after an average of ~14 years of service. This remains a key monitorable as the
bank would also soon witness a CEO change.
We expect HDFCB to deliver strong business growth, led by improved digital
offerings. On the asset quality front, although slippages are likely to remain
elevated, impacted by COVID-19, strong provisioning buffers should limit the overall
impact on earnings. The CEO’s succession remains an important observable in the
near term. Maintain Buy, with TP of INR1,250 (3.0x FY22E ABV).
Strong focus on digitalization; operating leverage continues to surprise
HDFCB has garnered major market share across multiple digital channels, with
17% market share in POS terminals, ~8%/~29% share in debit/credit card spends,
and a credit card base of 14.5m (25.1% share). ~95% of transactions happen
digitally, owing to which the bank has shown continuous improvement in its cost
ratios and business productivity. Thus, over the past five years, the C/I and cost-to-
asset ratios have improved by 592bp to 38.6% and 36bp to 2.0%, respectively. This
improvement came despite the addition of ~1400 branches and ~41k employees
over the similar period.
Improvement in RoRWA reflects adequate risk pricing
Over the long term, we note that besides a 44bp improvement in RoA over FY10–
20, RoRWA improved by ~56bp to ~2.6%. Furthermore, in FY20, RoRWA improved
by 20bp, much higher than a 7bp improvement reported in RoA. This indicates: a)
profitability has improved on the back of multiple levers (higher fee income and
lower opex) rather than simply on higher balance sheet risk and b) the bank has
been able to adequately price incremental risk on its unsecured book and earn a
higher return on the same.
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.