SUBMITTED TO

Institute of Management, Nirma University

AHMEDABAD

Stock Picked: HDFC BANK

College Name: Entrepreneurship Development Institute of India(EDI)

Team Name: EDI Warriors

Contact Details: Amit -9725514804, amitshahjinesh@gmail.com

Gaurav-9978996965 ,gau061@gmail.com
HDFC BANK
BUY
CMP 2040

Target price 2350

Investment period 12 months

HDFC BANK:

Company background

HDFC Bank, incorporated in 1994 by HDFC Limited, is the second largest private sector bank in
India, with a balance sheet size of over Rs2.4t. Rated as one of the best banks in India, it has
1,765 branches. The bank has been consistently growing its earnings at over 30% over the past
several quarters.

Stock info:

Industry Banking
CMP 2040
Mkt. cap full(cr.) 94,614
52 weeks H/L 2518/1550
Beta 0.8
Sensex 18022
Price movement:
Retail loans grow strongly…
Retail loans grew 8% QoQ and 31% YoY across segments. Auto loans (up 36% YoY and 8%
QoQ), CV and CE (up 41% YoY and 12% QoQ) and business banking loans (up 29% YoY and
9% QoQ) growth remains strong. Home loans declined 4% QoQ and grew 42% YoY on a lower
base. During the quarter, the bank did not exercise options to buy back loans from HDFC Ltd.

...driving overall loan growth

Overall loan growth was strong at 7% QoQ (on a higher base) and 38% YoY. Even after
adjusting for one-off opportunity in wholesale loans, core loan growth was 32% YoY against
19% growth for the industry. The management expects growth to be strong due to
(1) increased focus on medium/long tenure corporate (especially infrastructure) loans,

(2) strong demand for auto loans,

(3) selective disbursement in unsecured loans like personal loans and credit cards,

(4) strong growth from rural and semi-urban areas for existing
products, and

(5) continued buy-back of home loans from HDFC Ltd to fulfill priority
sector targets.

While the management guides for over 25% loan growth, we believe loan
growth will accelerate to 30% in FY11. YTD loan growth is 23.6% against the industry
growth 6%.

Stellar performance on CASA deposits

Deposits grew 30% YoY and 7% QoQ to Rs1.95t. CASA growth was robust during the quarter
increasing by 10% QoQ. Savings deposits posted robust growth of 11% QoQ and CA deposits
grew ~9% QoQ. CASA deposits grew 31% YoY, (savings grew at a healthier 38%). CASA
performance is impressive considering the rising cost of deposits. Despite pressure on CASA
ratio (due to a rising interest rate scenario), the management expects to maintain it at over 48%
against 50% as on 2QFY11.

Margins superior at 4.2%

NIM declined by 10bp QoQ (stable YoY) from elevated levels of 4.3%, due to the rising cost of
funds. However, the fall in NIM was restricted due to strong traction in low cost deposits and
improvement in yield on loans. Despite a rise in bulk deposit rates and retail term deposits rates
(up ~100bp across maturities and expectations of another deposit rate hike in October 2010), the
management expects to maintain margins of 4.1-4.2% in FY11. We expect margins to be stable
or decline marginally from 4.2% due to (1) strong CASA ratio, and (2) improved asset yields in a
rising interest rate scenario.

Sequential growth of 8% in fees impressive

Other income declined 9% YoY to Rs9.6b due to a loss on the sale of investments. The bank
booked a oss on the sale of investment of Rs521m in 2QFY11 against a trading gain of Rs1.63b
in 2QFY10 and Rs215m in 1QFY11. Fee income growth was strong at 8% QoQ and 16% YoY.
The management expects fee income to grow by ~18% in FY11 despite pressure on third-party
distribution fees (15% of overall fee income) as increased volume growth will compensate for an
expected decline in insurance commission.

Asset quality best in the industry

Gross NPAs increased by 3% QoQ to Rs18.4b. Gross NPA ratio was 1.16% v/s 1.21% a quarter
earlier and 1.76% a year earlier. Net NPAs were sequentially stable at 4.1%. Net NPA ratio was
0.3% v/s 0.5% in 2QFY10. Provision coverage ratio was strong at 78% (77% a quarter earlier).
From 1QFY11 the bank began to recognize floating provisions as part of tier-II capital rather
than netting up from NPA. Outstanding restructured loans at a mere 10bp of gross standard loans
also give comfort on the balance sheet quality. Lower pressure on margins and a sharp decline in
credit cost will lead to a sharp improvement in risk-adjusted margins.

Key investment arguments

 Strong focus on retail loans (52% of loans) and high proportion of CASA deposits (50%
of total deposits) enable superior margins of over 4%.
 Gross NPAs at 1.2% and net NPAs at 0.3%, with restructured standard loans of just
10bp, are among the lowest in the industry, indicating superior risk management skills.
 After the rundown of the CBOP book and with a lower proportion of unsecured retail
loans, credit costs are expected to come off sharply in FY11.
 Core operating profitability is improving at a faster pace, with strong loan growth, stable
margins and improving operating leverage.
  DEPOSITS

180000

160000

140000

120000

100000
HDFC (in crores)
80000
Axis (in crore)
60000

40000

20000

0
2005-06 2006-07 2007-08 2008-09 2009-10

Deposits HDFC (in crores) Axis (in crore)

2005-06 55796.82 40,113.53
2006-07 68297.94 58,785.60
2007-08 100768.6 87,626.22
2008-09 142811.58 117,374.11
2009-10 167404.44 141,300.22
  OPERATING PROFIT

10,000.00
9,000.00
8,000.00
7,000.00
6,000.00
5,000.00 HDFC (in crores)

4,000.00 Axis (in crores)

3,000.00
2,000.00
1,000.00
0.00
2005-06 2006-07 2007-08 2008-09 2009-10

Operating Profit HDFC (in crores) Axis (in crores)

2005-06 2,059.03 950.9
2006-07 2,059.03 1,193.09
2007-08 4,884.60 2,034.80
2008-09 8,919.75 2,999.92
2009-10 8,267.82 3,941.77
LOANS & ADVANCES
7,000.00

6,000.00

5,000.00

4,000.00
HDFC (in crores)
3,000.00 Axis (in crores

2,000.00

1,000.00

0.00
2005-06 2006-07 2007-08 2008-09 2009-10

Loans &Advances HDFC (in crores) Axis bank (in crores

2005-06 2,277.09 1,679.98
2006-07 3,605.48 1,892.07
2007-08 4,402.69 2,784.51
2008-09 6,356.83 3,745.15
2009-10 6,356.83 3,901.06
Financial Ratios:

1. NET INTEREST MARGIN:

5
4.5
4
3.5
3
2.5 HDFC BANK

2 AXIS BANK

1.5
1
0.5
0
2005-06 2006-07 2007-08 2008-09 2009-10

Year Net Interest Avg. Interest Net Interest Net Interest

Income(in lacs) Earning Asset (in Margin HDFC Margin AXIS Bank
lacs.) Bank (%) (%)
2005-06 230068 57517 4.0 3.14
2006-07 346848 86712 4.0 3.27
2007-08 522788 118815.45 4.4 3.77
2008-09 742116 176694.28 4.2 4.24
2009/10 838660 195037.20 4.3 3.95

Net Interest margin of HDFC Bank remains almost consistent over the years where it is also
above the industry average which is around 3.5%. Where NIM of SBI is 3.82% and it is also
consistent over the years and NIM of ICICI Bank is 4.08%. HDFC Bank has managed to keep its
NIM well above the other peer banks which show the good management of the bank. But if you
see the NIM of the AXIS bank over the last five year they have continuously improved from
4.08% to 5.34% which implies the better management then the HDFC Bank. We expect HDFC
Bank to further improve their NIM in coming years.

2. CAPITAL ADEQUACY RATIO

20
18
16
14
12
10 HDFC Bank

8 AXIS Bank

6
4
2
0
2005-06 2006-07 2007-08 2008-09 2009-10

Strong Capital adequacy and branch expansion to drive CASA and Credit market share gains,
respectively The key positive from the results was the CASA deposit growth of 37.5% yoy and
8.9% quentially, driven by a 30.9% yoy growth in Current deposits and a 42.9% yoy growth in
Savings deposits. The strong traction in CASA growth is attributable to the bank‟s aggressive
branch expansion during the year and to the increasing productivity of the branch network of
CBOP. The bank opened a substantial 313 branches and 937 ATMs during FY2010, to take its
branch network to 1,725 branches and 4,232 ATMs at the end of FY2010 (incidentally, the cost-
to-income ratio of the bank remained healthy during FY2010 at 48%).The bank plans to open
another 150 branches during FY2011E. Against this backdrop, we expect the bank to sustain a
CASA ratio in the range of 49-52%,going forward. The Bank‟s total Capital Adequacy (as per
Basel-2 guidelines) remained strong at 17.4%, with Tier-I forming 75% of the total CAR. The
bank has sufficient CAR to grow its advances 5-8% above the industry growth over FY2010-
12E.
Year Tier-I Tier-II Risk Capital Capital
Weighted Adequacy Adequacy
Asset Ratio HDFC Ratio AXIS
Bank (%) Bank (%)
2005-06 514991 172071 6021762 11.41 11.08
2006-07 635271 333999 7408192 13.08 11.57
2007-08 1106296 354837 10744799 13.60 13.73
2008-09 1369028 660492 12938268 15.69 13.69
2009-10 2054885 649194 15498301 17.44 15.8

Capital Adequacy ratio of the HDFC Bank improves over the years and it‟s the way ahead of the
Basel-II norms which is 9 %. It has improved from 11.41% in 2005-06 to 17.44%. This shows
the improvement in financial strength of the bank. Whereas CAR is around 13% of the Public
sector banks and private sector bank like ICICI Bank which has CAR of 19.14%, YES Bank has
20.60%, and City bank has 18.14%.
 3. NON-PERFORMING ASSET (NPA):

NPA

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05 NPA
0

0.7

0.6

0.5

0.4
HDFC Bank
0.3 AXIS Bank

0.2

0.1

0
2005-06 2006-07 2007-08 2008-09 2009-10
Year Non-performing Assets Ratio HDFC Bank (%) Non-performing Assets Ratio AXIS Bank (%)

2005-06 0.36 0.34

2006-07 0.43 0.38
2007-08 0.47 0.42
2008-09 0.63 0.4
2009-10 0.31 0.4

NPA of the HDFC Bank remains very low compared with its peer banks. NPA has increased
exponentially in the year 2008-09 from 0.43% to 0.63%. One reason of this was the merger of
Centurion Bank of Punjab with the HDFC Bank having NPA of 1.26% before the merger. Due to
recession, HDFC bank totally stopped the outflow of the new credit owing to increase pressure
on existing loan portfolio and also the fear of anticipated mass job losses, resulted in high NPAs
as shown in the 2009-10 NPA which came down drastically form 0.63% to 0.31%. Substantially
low NPA of the bank shows the good quality asset it has. While the Public sector bank has very
high compared to the HDFC Bank and industry average of the NPA is around 1.00%. We expect
the NPA of the HDFC Bank remain moderate as bank is very cautious in giving loans.
 4. CASA :

HDFC BANK
70

60

50

40

30 HDFC BANK

20

10

0
2005-06 2006-07 2007-08 2008-09 2009-10

Year Saving Current Total CASA Ratio

Deposits(Cr.) Deposits(Cr.) Deposits(Cr.) (%)
2005-06 16186 14752 55797 55.44
2006-07 19585 19812 68298 57.68
2007-08 26154 28760 100769 54.49
2008-09 34915 28445 142812 44.36
2009-10 49877 37227 167404 52

As CASA is a cheaper source of fund HDFC Bank highest CASA in the banking industry.
CASA of the HDFC Bank was 55.44% in 2005-06 and had marginal declined over the last five
years. It was 52% in 2009-10. As banking customer has better investment opportunity rather than
saving in the bank so it may further decline in coming years.
Valuation and view

HDFC Bank is best placed in the current environment with (1) CASA ratio of ~50% (a boon in a
rising interest rate scenario), (2) strong growth outlook of 25-30%, (3) improving operating
efficiency, and (4) lower credit costs, led by best-in-class asset quality. In our view, EPS growth
will be 30% CAGR over FY10-12 against 25% posted over FY05-10.We expect EPS to be Rs85
in FY11 and Rs111 in FY12. We expect RoE to be 17% by FY11 and 19% by FY12. We
estimate BV of Rs543 in FY11 and Rs631 in FY12. The stock trades at 4.4x FY11E BV, 3.7x
FY12E BV, 28x FY11E and 21.2x FY12E EPS. While the key operating parameters would be
the best among peers, valuations factor in all positives, in our view. We are bullish on HDFC
BANK with a target price of Rs2,350.

Sector view
 In FY10 loans and deposits grew 17%. We expect loan growth of 20% in FY11 with an
upward bias. Deposit growth will be calibrated with loan growth.

 We factor-in 15-20bp improvement in blended margins, led by improving yield on assets

and higher CASA ratio.

 Our concern over asset quality is diminishing with the improvement in economic
activity.

 We prefer banks with a strong core deposit franchise, higher tier-I capital and high
provision coverage ratio.

Key risks

Sustaining current business parameters with increase competitive pressures is a key risk.
FUTURE OF BANKING INDUSTRIES AND HDFC BANK

The Indian economy is likely to continue to outperform its global counterparts in the coming
years, growing by around 8% against an average world output growth of 3.9%. Investment and
capacity expansion will be a crucial link in driving the growth. Buoyant domestic demand should
help it absorb headwinds from rising interest rates and inflation. With private capex and
infrastructure spending likely to gather ground, not only will the ongoing recovery sustain into
the coming financial years but will also translate into greater buoyancy in credit growth and
stronger growth prospects for the banking sector in general. Focus on investment in the next five
year is likely to render India an attractive market that is well positioned to take advantage of both
structural and cyclical gains while its strong domestic base is likely to limit the impact of
external stress on growth dynamics and returns.

HDFC Bank‟s mission is to be “a World Class Indian Bank”, benchmarking itself against
international standards and best practices in terms of product offerings, technology, service
levels, risk management and audit & compliance. The objective is to continue building sound
customer franchises across distinct businesses so as to be a preferred provider of banking
services for target retail and wholesale customer segments, and to achieve a healthy growth in
profitability, consistent with the Bank‟s risk appetite. HDFC Bank is committed to do this while
ensuring the highest levels of ethical standards, professional integrity, corporate governance and
regulatory compliance.

The Bank‟s business strategy emphasizes the following:

 Increase its market share in India‟s expanding banking and financial SBUs services
industry by following a disciplined growth strategy focusing on balancing quality and
volume growth while delivering high quality customer service;
 Leverage its technology platform and open scalable systems to deliver more products to
more customers and to control operating costs;
 Maintain high standards for asset quality through disciplined credit risk management;
 Develop innovative products and services that attract its targeted customers and address
inefficiencies in the Indian financial sector;
 Continue to develop products and services that reduce its cost of funds; and
 Focus on healthy earnings growth with low volatility.

FUTURE OF HDFC BANK

HDFC bank is performing well currently. As per the analysis above, it has higher chances of
showing better and improved efficiency and performance in the coming years. Also it is very
important for the bank to be very careful with its future strategies and plans because the bank
sector is becoming very crucial and the credit outflow and rates seem to increase in the coming
years and also the new banks may enter the bank sector and it may prose threat to HDFC bank‟s
exiting share in the market. So, in order to maintain its position, it has to consistently perform
well and improve its overall performance. Banks „s non interest income and ROA is consistent
over the years but it is not showing improvement ,it is the area of concern for the bank and
CASA will also decline over the year because of various investment opportunities the customer
have. HDFC Bank has grown almost 25% every year and it is expected to grow the same way as
it has grown. Its balance sheet size may not be like SBI or ICICI Bank but it has generated
wealth for the shareholders that we can see from the analysis and we expect that it will continue
to give good return to the shareholders.