7 June 2013
Annual Report Update | Sector: Financials
HDFC Bank
BSE SENSEX
S&P CNX
19,519
5,921
CMP: INR683
TP: INR755
Neutral
The best keeps getting better
Growth mantra – branch expansion, deeper product penetration
We went through HDFC Bank’s (HDFCB) annual report for FY13. Our key takeaways:
Retail franchise continues to deliver excellent results. Retail loans and deposits grew
27% and 24% respectively. The proportion of retail business increased from 60% in
FY11 to 65% in FY12 and 67% in FY13.
For FY13, slippage ratio and credit cost were at decadal lows of 1% and 0.6%,
respectively. Including general and floating provisions, coverage ratio was 203%.
Outstanding floating provisions stood at INR18.35b (INR7.7/share, 5.1% of net worth).
The bank is focusing on India’s hinterland – 88% of its branch openings during the year
were in semi-urban and rural areas.
We believe operating leverage will provide strong cushion to earnings. While visibility
on core operating parameters and growth is high, valuations are rich. Maintain Neutral.
Bloomberg
HDFCB IN
Equity Shares (m)
2346.7
M.Cap. (INR b)/(USD b) 1615/28.6
52-Week Range (INR)
727/499
1,6,12 Rel. Perf. (%)
2/-1/15
Financials & Valuation (INR b)
Y/E March
NII
OP
NP
NIM (%)
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
ABV/Sh. (INR)
RoE (%)
RoA (%)
Payout (%)
Valuations
P/E(X)
P/BV (X)
P/ABV (X)
Div. Yield (%)
2013 2014E 2015E
158.1 193.9 237.1
114.3 147.6 187.3
67.3
88.0 110.4
4.8
4.8
4.9
28.3
37.0
46.4
28.4
30.9
25.5
152.1 180.5 216.1
150.7 177.4 210.7
20.3
22.2
23.4
1.8
2.0
2.0
22.8
23.4
23.4
24.3
4.5
4.6
0.8
18.6
3.8
3.9
1.1
14.8
3.2
3.3
1.3
Focused retail strategy; liability profile improved further
Liability customer acquisition followed by exploitation of cross-selling
opportunities remains HDFCB’s key business strength. During the year, retail
loans grew 27% and retail deposits grew 24%. As at March 2013, retail deposits
constituted 75% of overall deposits, up from 72% a year ago (67% in FY11), led by
28% growth in retail term deposits (partially cannibalizing savings deposits, which
grew 19%). Fees earned from cross-selling third-party products grew 6% and
accounted for 15% of overall fees (stable YoY), down from 24% in FY11.
Aggressive franchise expansion – banking on India’s hinterland
During the year, the number of branches grew 20% to 3,062 (now just 40 branches
behind ICICIBC) and ATMs grew 21% to 10,743 (almost equal to AXSB and ICICIBC).
Presence in terms of number of cities in India increased 32% during FY13 and
5.6x over FY08. Of the 518 new branches in FY13, 193 were micro branches (2-3
member branches). 88% of the branches opened during the year were in rural
and semi-urban areas. Total customer base increased by 2.7m (10% growth) to
~28.7m in FY13 and has more than doubled in the last five years. Nevertheless,
customer acquisition has slowed from ~5m in FY12. The number of debit cards
increased ~12% in FY13 (15% CAGR over FY09-13) to 15.8m and the number of
credit card customers grew ~10% to 6.4m.
Shareholding pattern %
As on
Mar-13 Dec-12 Mar-12
Promoter
22.9
23.0
23.2
Dom. Inst
8.6
8.9
10.5
Foreign
51.7
51.4
48.8
Others
16.9
16.8
17.5
A third of HDFCB’s branches are less than 24 months old and a large part of its
branch expansion has happened in rural and semi-urban areas, where breakeven
period is 24-30 months. Strong expansion in the hinterland will not only help in
customer acquisition and product penetration, but also to meet priority sector
targets (already achieved 40%, overall). Deeper product penetration in mature
branches will lead to higher growth. While credit cost and slippages are at cyclical
lows, higher base on account of floating provisions provides strong cushion to
earnings. Visibility on core operating parameters and growth remains high;
however, this is adequately discounted in the rich valuations. Maintain
Neutral.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com) +91 22 3982 5415
1
Sohail Halai
(Sohail.Halai@motilaloswal.com) +91 22 3982 5430
Investors are advised to refer through disclosures made at the end of the Research Report.
Stock performance (1 year)
Operating leverage, mix change to drive earnings growth

HDFC Bank
Interesting quotes from Annual Report
The objective is to continue building sound
customer franchises across distinct businesses
so as to be a preferred provider of banking services for
its target retail and wholesale customer segments, and
to achieve a healthy growth in profitability, consistent
with the Bank’s risk appetite.
,,
From inception, your Bank’s business
philosophy has been based on four core values:
Operational Excellence, Customer Focus, Product
Leadership and People. During the year, we have added
Sustainability as the fifth core value.
,,
Other highlights
Wholesale loans grew 16.9% and deposits grew 9.3%. The share of wholesale
business declined to 33.2% from 35.4% a year ago.
On an average, the bank sourced home loans of INR10b per month for HDFC v/s
INR8b in FY12. It bought back a portfolio of INR51b from HDFC v/s INR47b in FY12.
Outstanding securitized loans stood at INR174b (7.3% of loans) v/s INR163b (~8%
of loans) a year ago. Over 95% of securitized assets on the balance sheet are part
of loan agreement with HDFC.
The bank received INR1.4b commission on housing loan sourcing v/s INR1.1b in
FY12.
Outstanding RIDF bonds increased to INR107b (3.2% of average interest earning
assets) from INR91b (3.4% of average interest earning assets).
PBT growth adjusted for one-off contingent provisions and floating provisions
was 25% (16% in FY12) v/s the reported 30% (29% in FY12).
Standard asset restructuring was negligible at INR22m v/s INR1.7b in FY12. Overall
asset restructuring was INR547m v/s INR6.7b in FY12. As at March 2013, outstanding
restructured loans stood at INR5.3b, of which standard restructured loans were
INR810m. Outstanding restructured loans including pipeline at 0.2% of gross loans.
As at March 2013, the proportion of loans maturing in one year was 38.6% (38.9%,
a year ago) while the proportion of deposits maturing in one year was 29% (status
quo since March 2010).
Risk weighted assets to total assets ratio increased to 76% from 71%, a year ago.
Exposure to real estate developers remained stable at 0.4% of total loans.
Exposure/loans/deposits to top-20 stood at 14.7%/12.8%/7.8% v/s 16.5%/14.9%/
8.6%, a year ago.
Combined balance sheet of overseas branches as at March 2013 stood at USD2.62b.
HDFCB added 1.58m basic banking savings deposit accounts in FY13 v/s 0.76m in
FY12.
7 June 2013
,,
,,
,,
Your Bank’s Investment Banking Group made
encouraging progress in both the debt and
equity capital markets business. The Bank established
itself as a leading player in debt capital markets and is
ranked as the 4th largest book runner in INR corporate
bonds for year ended March 31, 2013.
With the addition of the corporate finance and advisory
team during the year, your Bank is now well positioned
to offer the entire gamut of investment banking
services to its clients.
,,
2

HDFC Bank
Internal customers accounted for 75% of the incremental credit card issuance.
The bank has lent to more than 85k self help groups (SHGs), with outstanding
balance of INR7.4b.
Options outstanding stood at INR65.4m (2.8% of equity base); of these, 87% were
exercisable as at March 2013 at a weighted average price of INR409/share.
Important accounting changes in FY13, based on RBI direction
Commission paid to sales agents for originating fixed tenor retail loans is now
classified under Operating Expenses and subvention received from OEMs and
dealers is classified under Other Income. Earlier, the net amount was deducted
from Interest on Loans.
Recoveries from written-off accounts are classified as Other Income and are
directly charged off in Operating Expenses. Earlier, the bank was deducting the
same from Provisions for Loans.
Reclassification of income statement (INR m)
FY04
Interest on loans
New
12,250
Old
11,087
Removed
Net commission 1,163
Non interest income
New
5,193
Old
4,800
Added Recoveries
and subvention
393
Recoveries
8
Subventions
385
Operating expenses
New
9,648
Old
8,100
Added commiss.
to agent
1,548
Provisions
New
1,965
Old
1,957
Removed Recov.
8
FY05
18,781
16,637
2,144
7,194
6,513
680
-15
695
13,693
10,854
2,839
1,754
1,769
-15
FY06
30,173
27,002
3,171
12,371
11,240
1,131
44
1,087
21,168
16,911
4,257
4,845
4,801
44
FY07
47,416
43,342
4,074
16,792
15,162
1,630
161
1,469
29,751
24,208
5,543
9,413
9,252
161
FY08
FY09
FY10
FY11
FY12
73,822 123,885 123,935 155,376 211,244
69,667 121,368 120,983 150,850 205,366
4,154
24,959
22,832
2,128
628
1,500
43,110
37,456
5,654
15,476
14,848
628
2,517
37,007
32,906
4,100
2,441
1,660
59,505
55,328
4,177
21,238
18,797
2,441
2,952
45,736
39,831
5,905
3,498
2,407
64,757
59,398
5,359
4,526
49,452
43,352
6,101
4,355
1,745
77,800
71,529
6,271
5,878
57,836
52,437
5,399
4,402
997
92,776
85,901
6,876
24,904 23,422 18,774
21,406 19,067 14,372
3,498
4,355
4,402
Source: Company, MOSL
7 June 2013
3

HDFC Bank
Dupont analysis: Sharp improvement in risk adjusted margins, driving RoA (%)
Y/E March
Interest Income
Interest Expended
Net Interest Income
Core Fee Income
Fee to core Income
Core Income
Operating Expenses
Cost to Core Income
Employee cost
Other operating expenses
Core operating Profits
Trading and others
Operating Profits
Provisions
NPA provisions
Other Provisions
PBT
Tax
Tax Rate
RoA
Leverage (x)
RoE
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14EFY15E
6.7
2.8
3.8
1.7
30.7
5.6
2.9
52.6
0.6
2.3
2.6
-0.2
2.5
0.4
0.4
0.0
2.1
0.7
32.0
1.4
13.0
18.5
7.3
3.1
4.2
1.9
31.4
6.1
3.4
55.5
0.8
2.6
2.7
0.1
2.8
0.8
0.8
0.0
2.0
0.6
30.5
1.4
12.7
17.7
8.6
3.9
4.7
2.1
31.1
6.8
3.6
52.9
0.9
2.7
3.2
-0.1
3.1
1.1
1.1
0.1
2.0
0.6
30.3
1.4
14.0
19.5
9.4
4.4
5.0
2.0
28.5
7.0
3.8
54.6
1.2
2.7
3.2
0.2
3.4
1.4
1.1
0.2
2.0
0.6
30.3
1.4
12.5
17.7
10.5
5.6
4.8
2.1
30.2
6.9
3.8
54.1
1.4
2.3
3.2
0.2
3.4
1.3
1.2
0.1
2.1
0.7
32.0
1.4
11.9
16.9
8.1
3.8
4.3
2.1
32.8
6.4
3.2
50.2
1.1
2.1
3.2
0.2
3.3
1.2
1.1
0.1
2.1
0.7
31.3
1.5
11.1
16.1
8.2
3.8
4.4
2.0
31.2
6.4
3.1
48.6
1.1
2.0
3.3
0.0
3.3
0.9
0.5
0.5
2.3
0.8
32.5
1.6
10.7
16.7
9.1
9.5
9.1
4.9
5.2
4.7
4.2
4.3
4.4
1.9
1.8
1.8
31.7 29.7 28.6
6.1
6.1
6.1
3.0
3.0
2.9
49.2 49.9 47.1
1.1
1.1
1.0
1.9
2.0
1.9
3.1
3.1
3.2
-0.1
0.0
0.1
3.1
3.1
3.3
0.6
0.5
0.4
0.4
0.3
0.3
0.3
0.1
0.1
2.4
2.6
3.0
0.8
0.8
1.0
31.2 31.0 32.5
1.7
1.8
2.0
11.1 11.2 11.2
18.7 20.3 22.2
Source: Company,
8.9
4.5
4.4
1.7
28.3
6.1
2.8
44.9
1.0
1.7
3.4
0.1
3.5
0.4
0.4
0.1
3.0
1.0
32.5
2.0
11.4
23.4
MOSL
HDFC Bank PE band
HDFC Bank P/BV band
7 June 2013
4

HDFC Bank
Franchise
A third of the branches less than two years old
HDFCB added 518 branches across 446 cities in FY13
ATM/branch ratio stable at 3.5x
ATM network up 4.3x in five years; 1,800+ ATMs added in FY13
Branch Addition highest among peers (nos)
HDFC branch addition at 1.8x of the second best in peers
Faster penetration in hinterland (number of cities)
Presence in terms of number of cities in India has increased
4.6x since FY08
Customer base continues to increase (m)…
Customer base increased by 2.7m, led by expanding network
…as does credit card base (m)
Increased customer base has led to higher credit card base;
HDFCB has adopted a cautious approach for credit card
customer growth; 75% of incremental customer are internal
7 June 2013
5

HDFC Bank
Basel II and ALM profile
Proportion of risk-weighted assets (%)
The proportion of risk-weighted assets has increased
sharply (~5%)
Break-up of credit risk-weighted assets (%)
Over 70% of the assets are low risk weight; this has remained
largely stable
Top-10 funded exposure (%)
Exposure to stressed sectors significantly below peers;
exposure to retail remains high at 16%
Top-10 non-funded exposure (%)
Non-fund based exposure remains diversified
FY13 ALM (%)
Proportion of deposits maturing in one year has remained
stable for three years at ~25%
FY12 ALM (%)
Superior asset-liability management led by higher proportion
of granular retail deposits
7 June 2013
6

HDFC Bank
Loans, deposits and investments
Consolidating position among top retail lenders (%)
Conscious strategy of staying away from wholesale loans and
strong growth in retail loans across products led to improved share
Retail loan mix (%)
Retail banking growth remained robust, with healthy pace in
all retail loan products except CV/CE loans
Deposit mix (%)
Share of retail deposits continued to increase, demonstrating
power of strong liability franchise
Concentration of risk remains low (%)
Concentration details show improvement across categories
Investment break-up (%)
Investment book largely dominated by G-Sec; exposure to
debentures and shares remains low
Break-up of investments into HTM and AFS (INR b)
Share of AFS investments in total investments stable at ~38%
7 June 2013
7

HDFC Bank
NPA
Slippage ratio and credit cost at decadal lows (%)
Strong retail cycle helps bank to report lower delinquency
and hence lower credit cost
Proportion of sub-standard assets increases (%)
Proportion of sub-standard assets and loss assets down to
40% and 21%, respectively
Segment-wise NPA (%)
NPAs across sectors declined compared to previous year
Asset quality movement (%)
Asset quality performance remains impeccable, with GNPA at
1% and NNPA at 0.2%
Creating buffer (INR m)
Floating provisions as a percentage of average assets is 0.5%
whereas is 1.8x of FY13 NNPA
NNPA and standard restructured loans as percentage of loans
Net slippages and restructured loan book lowest among peers
7 June 2013
8

HDFC Bank
Earnings
Commendable performance on margins (%)
Core NIM (on average assets) improves further; best among
peers
Fee income growth moderates
Fee income growth moderates, led by decline in core forex
income
*
*As per new classification
*
Cost to core income and cost to average assets (%)
Cost to core income has remained stable over two years; is
expected to decline, as new branches achieve breakeven
Non-core income contribution declines further
Loss on derivative transaction increased to INR2.2b as
compared to INR1.2b in FY12
Higher trading gain (INR m)
Post two years of negative net invetment gains trading profits
help earnings
RoA at historical high (%)
Strong core operating performance and low delinquencies
lead to high RoA
7 June 2013
9

HDFC Bank
Financials and Valuation
Income Statement
Y/E March
2010
Interest Income
164,679
Interest Expense
77,863
Net Interest Income
86,816
Change (%)
13.1
Non Interest Income
45,736
Net Income
132,553
Change (%)
16.5
Operating Expenses
64,757
Pre Provision Profits
67,795
Change (%)
25.0
Provisions (excl tax)
24,904
PBT
42,891
Tax
13,404
Tax Rate (%)
31.3
PAT
29,487
Change (%)
31.3
Equity Dividend (Incl tax)
6,414
Core PPP*
64,345
Change (%)
27.7
*Core PPP is (NII+Fee income-Opex)
2011
203,808
93,851
109,957
26.7
49,452
159,409
20.3
77,800
81,609
20.4
23,422
58,187
18,923
32.5
39,264
33.2
8,948
82,135
27.6
2012
278,742
149,896
128,846
17.2
57,836
186,682
17.1
92,776
93,906
15.1
18,774
75,132
23,461
31.2
51,671
31.6
11,749
95,865
16.7
2013
350,649
192,538
158,111
22.7
68,526
226,637
21.4
112,361
114,276
21.7
16,770
97,506
30,249
31.0
67,257
30.2
15,360
112,663
17.5
(INR Million)
2014E
401,606
207,667
193,938
22.7
81,684
275,622
21.6
127,979
147,643
29.2
17,230
130,413
42,384
32.5
88,029
30.9
20,511
143,530
27.4
2015E
478,249
241,174
237,075
22.2
98,548
335,623
21.8
148,372
187,251
26.8
23,642
163,608
53,173
32.5
110,436
25.5
25,731
182,138
26.9
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
2010
4,577
210,648
215,225
1,674,044
17.2
871,039
37.5
129,157
206,159
2,224,586
299,424
586,076
-0.4
1,258,306
27.3
21,228
59,551
2,224,586
2011
4,652
249,140
253,793
2,085,864
24.6
1,099,083
26.2
143,941
289,929
2,773,526
296,688
709,294
21.0
1,599,827
27.1
21,706
146,011
2,773,526
2012
2013
4,693
4,759
294,553
357,383
299,247
362,141
2,467,064 2,962,470
18.3
20.1
1,194,059 1,405,215
8.6
17.7
238,465
330,066
374,319
348,642
3,379,095 4,003,319
209,377
272,802
974,829 1,116,136
37.4
14.5
1,954,200 2,397,206
22.2
22.7
23,472
27,031
217,216
190,144
3,379,095 4,003,319
(INR Million)
2014E
4,759
424,901
429,660
3,614,213
22.0
1,660,103
18.1
352,925
435,610
4,832,407
311,291
1,255,653
12.5
2,996,508
25.0
31,275
237,680
4,832,407
2015E
4,759
509,605
514,364
4,517,767
25.0
2,013,295
21.3
546,324
544,560
5,954,147
371,378
1,444,001
15.0
3,805,565
27.0
36,103
297,100
5,954,147
Asset Quality
GNPA (INR m)
NNPA (INR m)
GNPA Ratio
NNPA Ratio
PCR (Excl Tech. write off)
E: MOSL Estimates
18,168
3,921
1.4
0.3
78.4
16,943
2,964
1.0
0.2
82.5
19,994
3,523
1.0
0.2
82.4
23,346
4,690
1.0
0.2
79.9
38,942
10,452
1.3
0.3
73.2
(%)
59,763
18,367
1.6
0.5
69.3
7 June 2013
10

HDFC Bank
Financials and Valuation
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
Profitability Ratios (%)
RoE
RoA
Int. Expense/Int.Income
Fee Income/Net Income
Non Int. Inc./Net Income
Efficiency Ratios (%)
Cost/Income*
Empl. Cost/Op. Exps.
Busi. per Empl. (INR m)
NP per Empl. (INR lac)
* ex treasury
Asset-Liability Profile (%)
Loans/Deposit
CASA Ratio
Investment/Deposit
G-Sec/Investment
CAR
Tier 1
2009
9.1
11.0
6.8
4.7
4.5
4.4
4.8
2010
9.4
10.9
7.2
4.7
4.3
4.7
5.1
2011
10.4
11.9
7.7
6.1
5.6
4.4
4.8
2012
10.6
12.3
7.5
6.4
6.0
4.2
4.8
2013E
10.0
11.5
7.4
5.7
5.3
4.3
4.8
2014E
9.8
11.0
7.3
5.4
5.1
4.4
4.9
16.1
1.5
47.3
27.4
34.5
16.7
1.6
46.0
27.5
31.0
18.7
1.7
53.8
29.3
31.0
20.3
1.8
54.9
27.3
30.2
22.2
2.0
51.7
26.3
29.6
23.4
2.0
50.4
26.3
29.4
50.2
35.4
51.2
0.6
48.6
36.5
61.5
0.7
49.2
36.6
66.5
0.8
49.9
35.3
72.4
1.0
47.1
35.9
84.8
1.2
47.0
36.6
101.5
1.5
75.2
52.0
35.0
87.1
17.4
13.3
76.7
52.7
34.0
75.6
16.2
12.2
79.2
48.4
39.5
78.2
16.5
11.6
80.9
47.4
37.7
76.1
16.8
11.1
82.9
45.9
34.7
74.8
15.5
10.7
84.2
44.6
32.0
81.3
14.1
10.3
Valuation
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
94.0
32.9
92.8
12.9
22.1
2.4
109.1
16.0
108.2
16.9
31.0
3.3
127.4
16.8
126.4
22.0
30.4
4.3
152.1
19.4
4.5
150.7
4.6
28.3
28.4
24.3
5.5
0.8
180.5
18.7
3.8
177.4
3.9
37.0
30.9
18.6
7.4
1.1
216.1
19.7
3.2
210.7
3.3
46.4
25.5
14.8
9.3
1.3
7 June 2013
11

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