HDFC Bank
BSE SENSEX
35,319
S&P CNX
10,742
9 May 2018
Update
| Sector:
Financials
CMP: INR1,979
TP: INR2,400(+21%)
Buy
Well placed to capture emerging opportunities
Takeaways from the Annual Analyst Meet
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 / 1534
-2/2/11
5,136
79.7
2780.0
79.1
We attended HDFC Bank’s (HDFCB) annual analyst meet, wherein it showcased the
breadth of its top management and discussed the progress that different businesses are
making. Management, thus, highlighted the growth potential of different businesses and
further discussed succession planning, digital initiatives, competitive positioning,
subsidiary performance and the journey ahead. This note captures the detailed
takeaways from the meet, as well as our thoughts on the bank.
Key takeaways from session with Mr Aditya Puri – MD & CEO
Financials Snapshot (INR b)
2018 2019E 2020E
Y/E Mar
NII
400.9 464.8 568.4
OP
326.2 391.6 487.3
NP
174.9 210.6 257.0
NIM (%)
4.4
4.2
4.3
EPS (INR)
67.8
79.3
94.5
EPS Gr. (%)
19.4
16.9
19.3
BV/Sh. (INR)
409.6 527.9 604.4
ABV/Sh. (INR)
385.9 500.0 570.6
RoE (%)
17.9
16.9
16.7
RoA (%)
1.8
1.8
1.8
Payout (%)
22.9
20.8
19.9
Valuations
P/E(X)
29.2
23.2
20.9
P/BV (X)
4.8
3.5
3.3
P/ABV (X)
5.1
3.7
3.5
Div. Yield (%)
0.8
0.9
0.9
Stock Performance (1-year)
HDFC Bank
Sensex - Rebased
2,100
1,950
1,800
1,650
1,500
Macro:
According to HDFCB, the INR would not depreciate much from here,
fiscal deficit would remain in control and GDP growth is healthy at 7.3-7.5%.
Capacity utilization levels have increased to ~76%, and the investment cycle
generally picks up around 80% utilization levels. There is no systemic risk in the
Indian banking system. Financialization of the economy will keep increasing
and a lot of the wealth under the system is getting more formal. This is
generating more opportunities for the banking system.
HDFCB expects demand to exceed supply in the next five years. The bank
continues to see strong growth opportunities as the credit market still remains
largely underpenetrated. However, the bank will not chase growth at the
expense of margins/risks.
The bank plans to launch online loan against mutual funds – money will get
disbursed electronically without any manual intervention.
The bank has substantial management depth up to three levels down, and
thus, there are no concerns about management bandwidth and succession at
any level in the organization.
Cost-income trajectory is down, and the bank expects to continue benefiting
from digitization and operating leverage.
HDFCB is not averse to project financing and is willing to fund viable projects.
Expansion in rural and suburban regions is paying off, and the bank sees strong
growth opportunities in these areas.
The bank is empowering the ground level staff to ensure faster product
delivery and improve customer service. Granularity of the business has been
increasing.
Agri is not an easy business to grow, but important to focus on. Waivers, at
times, bring about an adverse impact, but agri remains a profitable business to
remain engaged in.
Management succession planning is in place. The bank will start looking for
candidates 18 months in advance and will announce the name 12 months
before the retirement timeline. Candidate can be both external and internal.
HDB Financial
will rapidly gain scale and become the leading consumer finance
NBFC in the country. Disinvestment in the company still remains sometime
away (for more details, please refer page 3).
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 |
Parth Gutka
(Parth.Gutka@MotilalOswal.com); +91 22 6129 1567
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
Market share gains to continue
Over the past 10 years, HDFCB 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 HDFCB to continue gaining market share to reach 10% by FY22, driven by
robust growth in the vehicle portfolio, business banking and unsecured segments.
Operating leverage to improve further; digital initiatives to 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.
Retail loan growth remains strong; working diligently to expand the pie
HDFCB 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.
Subsidiaries rapidly gaining scale; expected to add ~5% 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 INR127 to our TP, post hold-co discount of 20%.
Valuation view
We expect HDFCBK to record 23% loan book CAGR and 21% PAT CAGR over FY18-
20E, with RoA/RoE of 1.8%/16.7% 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.
We arrive at a TP of INR2,400 (4.0x Mar’20E ABV) and maintain our
Buy
rating.
9 May 2018
2

HDFC Bank
Key takeaways from session with top management team
Mr Aditya Puri – MD & CEO
Macro:
According to HDFCB, the INR would not depreciate much from here,
fiscal deficit would remain in control and GDP growth is healthy at 7.3-7.5%.
Capacity utilization levels have increased to ~76%, and the investment cycle
generally picks up around 80% utilization levels. There is no systemic risk in the
Indian banking system. Financialization of the economy will keep increasing and
a lot of the wealth under the system is getting more formal. This is generating
more opportunities for the banking system.
HDFCB expects demand to exceed supply in the next five years. The bank
continues to see strong growth opportunities as the credit market still remains
largely underpenetrated. However, the bank will not chase growth at the
expense of margins/risks.
The bank plans to launch online loan against mutual funds – money will get
disbursed electronically without any manual intervention.
The bank has substantial management depth up to three levels down, and thus,
there are no concerns about management bandwidth and succession at any
level in the organization.
Cost-income trajectory is down, and the bank expects to continue benefiting
from digitization and operating leverage.
HDFCB is not averse to project financing and is willing to fund viable projects.
Expansion in rural and suburban regions is paying off, and the bank sees strong
growth opportunities in these areas.
The bank is empowering the ground level staff to ensure faster product delivery
and improve customer service. Granularity of the business has been increasing.
Agri is not an easy business to grow, but important to focus on. Waivers, at
times, bring about an adverse impact, but agri remains a profitable business to
remain engaged in.
Management succession planning is in place. The bank will start looking for
candidates 18 months in advance and will announce the name 12 months
before the retirement timeline. Candidate can be both external and internal.
HDB Financial
will rapidly gain scale and become the leading consumer finance
NBFC in the country. Disinvestment in the company still remains sometime
away.
Wholesale Banking – Digitization and geographical penetration throwing
new opportunities
Transaction banking and FX side of balance sheet are both seeing improvement
in penetration. Better service, TAT and pricing – all working in favor. 12% of
India’s USD trade is through HDFCB.
Business banking
is seeing rapid digitization and cross-sell is emerging as a big
opportunity. Sourcing is done through branches, and a healthy share of business
comes from semi urban and rural areas.
30% of wholesale book is in term financing space, and the bank is not averse to
project financing. However, it follows rigorous credit assessment for lending
toward any project. The factors include – cash flows, risk adjusted margins,
corporate standing and government approvals. Once the project is up and
running, then
significant competition comes from bond markets.
Low-risk
projects are shifting toward the bond market.
3
9 May 2018

HDFC Bank
DCM and ECM business
Debt Capital Market business
– This is add on to the corporate banking
business. Focus is on volumes as fees/commission rates are under pressure.
DCM business is pure distribution business and the bank has 18-20% market
share.
Equity Capital Market business
– This is more like project financing. There is
a healthy IPO pipeline in place.
M&A banking
– This is a tough business and has 18 months plus gestation cycle.
Focus is on large clients in this segment.
Emerging corporate group
– INR2-10b; changing customer needs and
digitization are driving growth. 2
nd
and 3
rd
generation entrepreneurs coming in
the business, who are more receptive to digital solutions.
NCLT-related lending opportunities
– Will be very selective in lending here and
will closely evaluate the corporate who is bidding.
Business banking - INR0.5-2b
– This business is driven by better geographical
penetration in the country. Digital platform is helping gain market share. The
business is well collateralized. Feet on street and geographical presence are
important in business banking. Regular training of employees is thus required.
HDFC Securities – customer acquisition momentum remains strong
8m active customers in industry. HDFC Securities has a customer base of 0.65m
(penetration rate of ~5% with HDFCB customer base). There is, thus, a strong
opportunity to acquire customers.
The company has started distributing mutual funds and insurance. In the last
three years, the company has done 300,000 SIPs.
Top line is growing at 40%; more than doubled the bottom line in the last three
years. Revenue mix: 85% brokerage and 15% distribution. Within brokerage,
97% is through retail.
The company has 4.2% revenue market share in retail and 3% in overall
brokerage pie.
Discount brokers can coexist with regular brokerage companies. Do not see any
threat to growth.
17% of customers are using only digital channels to execute their orders;
however, their revenue share is ~44%.
The company earned INR0.25b interest income on margin funding in FY18.
Operating leverage is likely to improve further. FY18 cost-to-income ratio was
34% v/s 40% earlier.
The company has 259 branches.
HDB Financials – Focused on size and profitability
The company has INR445b of loan book and has presence in 831 cities through
1151 branches. More than 50% of the branches are less than 3 years old.
Current customer base is >1m. NII/PAT/AUM growth of 37%/38%/30% in FY18.
It has its own distribution, underwriting and sales team, and doesn’t have any
arrangement with HDFC Bank. New to credit customers at 40%. 70-75% is the
approval rate.
9 May 2018
4

HDFC Bank
Three key product segments:
Enterprise loans (~50% of book) –
Ticket size: INR1.5m. Loan tenure 4-5
years.
Asset financing (~35% of book)
– Truck, CE, tractor financing. Ticket size:
INR0.8-1m. Loan tenure: 3 years. Customer base would be largely FTU or
small fleet operator.
Consumer lending (~15% of book)
– Miscellaneous purpose loans. Ticket
size: INR 7,000 to 100,000. Loan tenure is <2 years. This segment has bulk of
the customers and is largely unsecured.
BPO business
– collection business for the bank. Runs 13 call centers – 4,500
employees. Only works for the bank and not third parties.
Cost structures are different across segments. 37-38% at aggregate level.
Operating leverage will begin to show up gradually.
Asset quality has been healthy, with GNPA of 1.6% and NNPA of 0.96%. The
company has been following 90dpd NPL recognition norm since 1-Apr-17.
RoE will improve on higher leverage; 2.5% RoA will remain stable.
Raised capital in March-17, had a rights issue after that. Has NW of INR60b. CAR
is ~18%.
Retail assets – Cross sell opportunities overlapping with increasing
financialization
Unsecured growth has been higher in last few years, mostly driven by under-
penetration.
GST is driving shift from unorganized to organized sector. SME penetration is
even lower than retail assets as a % to GDP, and thus, offers strong growth
opportunities.
20-60% of sourcing for retail products is from existing customers. The bank
doesn’t differentiate in terms of underwriting between new and existing
customers, but pricing to new customer can be higher.
Credit pricing has declined in last two years in selected pockets.
50-55% is the revolve rate in credit card business; this has improved across
industry.
Liabilities – Growth momentum remains strong
HDFCB has nearly 5,000 branches being operated by 35,000 employees. Branch
remains the main source of customer sourcing.
The bank has a strong focus on customer service. Continuous training is
provided to staff to service customers in best possible manner.
Looks at pure customer profitability, not the product line profitability.
Adding 0.7m customers every month (0.25m salaried customers every month).
Attrition is there, but strong brand and processes help retain and attract talent.
Debit card base is stagnant as the bank regularly purges inactive cards.
Government business – market yet to play out fully because of PSU dominance,
but sees strong opportunities here.
9 May 2018
5

HDFC Bank
Digital Banking: Adding scalability; Improving customer experience
85% transactions happen through digital channels (it was nearly 40% five years
ago).
The bank believes in empowering customers by offering varied services on
digital channels. This has helped strengthen the brand and improved customer
experience. Next in the journey is to take this experience to the level of hyper -
personalization.
Chatbots and voice interactive capabilities (Google Home, Alexa etc.) have been
developed with change in customer behavior, as people spend more time
looking at phones instead of talking on phones.
Virtual bank – focuses on mass affluent besides HNIs who currently are not
having HDFCB as their prime banking partner. Zero compromise on customer
privacy.
Paytm is not a threat currently as the operating space is very different but
remains watchful of it.
WhatsApp payment works on a multi-bank model; will always work as a
network, so no real threat.
Payback from investment is assessed on – Relationship value, number of
transactions and cost/time savings. The bank is doubling up the digital banking
team size every year.
Technology + Operations: Ably supporting massive volumes
HDFCB is the largest processing bank in the country. Processes 320m cheque
transactions in a year (market share of ~24%). Cash management transactions of
100m, 40m RTGS and 30m NEFT, with typical market share of 15-26% by value
over these segments. Overall bank handles nearly 200m customer transactions
in a year.
Handled inward remittance of USD12b in FY18. Has the highest market share on
stock exchanges, while ranks amongst top 5 on most currency products.
The bank handles 31 currency chests and daily manages movement of INR20b of
cash across its ATMs.
The bank has 33% market share in card acquisition. HDFCB originates 1.2m 2
wheeler loans, 0.9m PL and 0.46m auto loans in a month.
Auto verification of signatures on low-value cheque will help improve efficiency,
as currently 87% of cheques are of less than INR25k.
Cards & Payments: Leadership position to continue
POS remains a huge opportunity. The bank’s throughput remains high, while
network is not the biggest.
Apparrels and dining are two top spend categories. Utilities payment is also
gaining size.
Interchange revenue on debit card has declined post regulatory intervention.
50:50 online to physical mix in credit card spends.
80% of card sourcing still happens from liability customer base.
The mix of top 10 towns in total card spend has declined to 60% v/s 80% few
years ago.
Credit cards – HDFCB currently accounts for 29% of the total credit card
market by both 9MFY18 POS transaction volume and transaction amount.
This
6
9 May 2018

HDFC Bank
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.
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 HDFCB 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.
Exhibit 1: HDFCB 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)
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 2: …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. HDFCB’s focus on extending these
unsecured products largely to salaried customers also helps it in maintaining
healthy asset quality.
9 May 2018
7

HDFC Bank
Operating leverage continues to surprise positively;
digitization has helped reduce sourcing cost
HDFCB 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:
HDFCB 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.
Most of the disbursements through this channel are to HDFCB’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.
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 4: 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 3: 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
9 May 2018
8

HDFC Bank
Exhibit 5: Branches with less than 3 years vintage have
decreased in absolute numbers…
Exhibit 6: …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 7: 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 8: …as has business per employee, INRm
HDFC Bank
Axis Bank
ICICI Bank
IndusInd Bank
142
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
81
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
9 May 2018
9

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 HDFCB.
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 INR127 to our TP, post hold-co discount of 20%.
Exhibit 9: HDB Financials has recorded 42% AUM CAGR over
FY13-17
AUM (INRb)
Exhibit 10: …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
9 May 2018
10

HDFC Bank
Exhibit 11: RoA/RoE continues to be healthy for HDB while…
RoA
RoE
1.9
1.6
16.7
12.5
14.7
2.1
2.4
2.3
48
Exhibit 12: …asset quality has remained pristine
Net NPA (bps)
73
85
16.0
15.3
42
FY13
FY14
FY15
FY16
FY17
FY14
FY15
FY16
FY17
Source: MOSL, Company
Source: MOSL, Company
Exhibit 13: HDFC Sec has recorded 34% CAGR over FY13-17…
PAT
2.2
Exhibit 14: …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 15: 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 16: …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 17: 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
9 May 2018
11

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.
HDFCB 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, HDFCB 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:
HDFCB 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 21% PAT CAGR over FY18-20,
with RoA/RoE of 1.8%/16.7% 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.
We arrive at a target price of INR2,400 for the bank (4.0x Mar’20E ABV for
standalone bank and INR127 for the subs) and maintain
Buy.
Exhibit 18: DuPont Analysis for HDFCBK – operating leverage continues to boost profitability
Y/E March
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
PBT
Tax
RoA
Leverage (x)
RoE
FY13
4.28
1.3
0.5
1.9
5.63
3.04
1.07
1.97
3.10
2.58
0.45
2.64
0.82
1.82
11.2
20.3
FY14
4.14
1.3
0.5
1.8
5.44
2.70
0.94
1.76
3.22
2.74
0.36
2.86
0.96
1.90
11.2
21.3
FY15
4.14
1.2
0.4
1.7
5.37
2.59
0.88
1.71
3.22
2.79
0.38
2.83
0.94
1.89
10.3
19.4
FY16
4.25
1.2
0.4
1.7
5.48
2.61
0.88
1.74
3.29
2.86
0.42
2.87
0.98
1.89
9.6
18.3
FY17
4.21
1.1
0.4
1.6
5.33
2.51
0.82
1.68
3.27
2.83
0.46
2.82
0.97
1.85
9.7
17.9
FY18
4.16
1.2
0.4
1.6
5.74
2.35
0.71
1.65
3.38
3.03
0.61
2.77
0.96
1.81
9.8
17.9
FY19E
3.97
1.27
0.32
1.58
5.55
2.21
0.66
1.55
3.34
3.02
0.60
2.74
0.95
1.80
9.4
16.9
FY20E
4.02
1.25
0.32
1.57
5.59
2.15
0.63
1.52
3.44
3.12
0.67
2.77
0.96
1.82
9.2
16.7
Source: Company, MOSL
9 May 2018
12

HDFC Bank
Financials and Valuations
Financials
Y/E March
Interest Income
Interest Expense
Net Interest Income
Growth (%)
Non Interest Income
Total Income
Growth (%)
Operating Expenses
Pre Provision Profits
Growth (%)
Core PPP
Growth (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
PAT
Growth (%)
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
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
2013
23,346
4,690
1.0
0.2
1.61
0.57
79.9
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
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
2014
29,893
8,200
1.0
0.3
1.93
0.60
72.6
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
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
2015
34,384
8,963
0.9
0.2
1.58
0.52
73.9
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
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
2016
43,928
13,204
0.9
0.3
1.56
0.51
69.9
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
802,414
401,465
400,949
21.0
152,203
553,152
21.7
226,904
326,248
26.8
306,408
38.7
59,275
266,973
92,106
34.5
174,868
20.2
2019E
972,233
507,385
464,848
15.9
185,688
650,536
17.6
258,944
391,592
20.0
367,592
20.0
70,079
321,513
110,922
34.5
210,591
20.4
2020E
1,175,417
606,993
568,425
22.3
222,825
791,250
21.6
303,915
487,335
24.4
458,340
24.7
94,995
392,340
135,357
34.5
256,983
22.0
Balance Sheet
Y/E March
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Growth (%)
of which CASA Dep
Growth (%)
Borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Growth (%)
Loans
Growth (%)
Fixed Assets
Other Assets
Total Assets
Asset Quality
2017
2018E
2019E
2020E
5,125
5,190
5,436
5,436
855,571 1,057,760 1,429,597 1,637,506
860,696 1,062,950 1,435,033 1,642,943
6,436,397 7,887,706 9,425,809 11,235,565
17.8
22.5
19.5
19.2
3,091,525 3,352,275 4,119,079 5,100,946
30.8
8.4
22.9
23.8
740,289 1,231,050 1,374,543 1,928,352
601,020
457,637
562,893
692,359
8,638,402 10,639,343 12,798,278 15,499,217
489,521 1,229,151
972,032 1,132,097
2,144,633 2,422,002 2,954,843 3,545,812
9.5
12.9
22.0
20.0
5,545,682 6,583,331 8,104,080 9,895,082
19.4
18.7
23.1
22.1
36,267
36,072
43,485
48,268
422,298
368,787
723,839
877,959
8,638,402 10,639,343 12,798,278 15,499,217
2017
58,857
18,440
1.1
0.3
1.53
0.62
68.7
2018E
86,070
26,010
1.3
0.4
1.65
0.90
69.8
2019E
105,220
32,875
1.3
0.4
1.55
0.94
68.8
2020E
133,471
40,557
1.3
0.4
1.60
1.05
69.6
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
9 May 2018
13

HDFC Bank
Financials and Valuations
Ratios
Y/E March
Yield & Cost Ratios (%)
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
Capitalisation 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
6.0
5.9
4.3
4.6
2017
9.6
10.2
7.8
5.5
5.3
4.2
4.6
2018E
9.4
10.3
7.2
4.9
5.2
4.5
4.4
2019E
9.5
10.4
7.5
5.1
5.3
4.4
4.2
2020E
9.4
10.3
7.5
5.1
5.2
4.3
4.3
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
14.7
13.2
1.5
16.0
14.8
1.2
14.7
13.7
0.9
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
83.5
42.5
2.1
41.0
42.5
50.0
21.4
27.5
30.0
30.7
86.0
43.7
2.0
39.8
41.3
52.2
22.8
28.5
30.0
31.3
88.1
45.4
2.0
38.4
39.9
51.6
22.4
28.2
29.1
31.6
Valuation
RoE
RoA
RoRWA
Book Value (INR)
Growth (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Growth (%)
Price-Earnings (x)
Dividend Per Sh (INR)
Dividend Yield (%)
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
5.9
331
6.0
56.8
16.7
34.9
11.0
0.6
17.9
1.8
2.5
410
22.0
4.8
386
5.1
67.8
19.4
29.2
15.5
0.8
16.9
1.8
2.4
528
28.9
3.7
500
4.0
79.3
16.9
25.0
16.5
0.8
16.7
1.8
2.3
604
14.5
3.3
571
3.5
94.5
19.3
20.9
18.1
0.9
9 May 2018
14

HDFC Bank
NOTES
9 May 2018
15

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.
Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
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which are available on
www.motilaloswal.com.
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MOSL, it’s associates, Research Analyst or their relative may have any financial interest in the subject company. MOSL and/or its associates and/or Research Analyst may have beneficial ownership of 1% or more securities in the subject company at
the end of the month immediately preceding the date of publication of the Research Report.
MOSL and its associate company(ies), their directors and Research Analyst and their relatives may; (a) from time to time, have a long or short position in, act
as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial
instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.;
however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOSL even though there
might exist an inherent conflict of interest in some of the stocks mentioned in the research report.
Research Analyst may have served as director/officer, etc. in the subject company in the last 12 month period. MOSL and/or its associates may have
received any compensation from the subject company in the past 12 months.
In the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report, MOSL or any of its associates may have:
a)
managed or co-managed public offering of securities from subject company of this research report,
b)
received compensation for investment banking or merchant banking or brokerage services from subject company of this research report,
c)
received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report.
d)
Subject Company may have been a client of MOSL or its associates during twelve months preceding the date of distribution of the research report.
MOSL and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. To enhance transparency, MOSL has incorporated a Disclosure of Interest Statement in
this document. This should, however, not be treated as endorsement of the views expressed in the report. MOSL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result,
the recipients of this report should be aware that MOSL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or
brokerage service transactions.
Terms & Conditions:
This report has been prepared by MOSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part
or in whole, to any other person or to the media or reproduced in any form, without prior written consent of MOSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report
is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied,
is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to
buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOSL will not treat recipients as customers by
virtue of their receiving this report.
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the
specific recommendations and views expressed by research analyst(s) in this report.
Disclosure of Interest Statement
Analyst ownership of the stock
HDFC Bank
No
A graph of daily closing prices of securities is available at
www.nseindia.com, www.bseindia.com.
Research Analyst views on Subject Company may vary based on Fundamental research and Technical Research. Proprietary trading desk of MOSL or
its associates maintains arm’s length distance with Research Team as all the activities are segregated from MOSL research activity and therefore it can have an independent view with regards to subject company for which Research Team have
expressed their views.
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Persons in Singapore should contact MOCMSPL in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of
whom may consist of "accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such
Singapore Person must immediately discontinue any use of this Report and inform MOCMSPL.
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced
in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in
this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of
independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document
(including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including
those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy,
completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform
investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this
into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and
the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or
published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such
distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall
be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees
to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-38281085.
Registration details of group entities.: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100.IRDA Corporate Agent-CA0541. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS
(Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers
Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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