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HDFC Bank (HDFCB)
Banks/Financial Institutions
US GAAP report reaffirms the strong retail story. We analyze the US GAAP report
for HDFC Bank for FY2011. Key takeaways: (1) Risk-adjusted margins improved sharply
in FY2011, especially in retail. (2) Deposit profile remains strong led by higher share of
retail deposits primarily from its corporate salary account base. (3) Asset quality trends
appear healthy with sharp improvements, specifically in the retail segment. However,
valuations at 3.1X book and 17X FY2013 EPS delivering RoEs in the range of 18-19%
levels and EPS growth of 28% CAGR for FY2011-13E, appear to factor in most
positives; retain ADD.
Risk-adjusted margins at peak, will likely moderate
We expect the current risk-adjusted NIM (NIM less loan-loss provisions) performance to moderate,
especially in retail assets, by about 30 bps by FY2013E as slippages start to rise and pressure on
NIM continues. FY2011 saw risk-adjusted NIM at a cyclical high (retail margins improved by 120
bps to 7% and corporate risk-adjusted NIMs improved by 40 bps to 1.2%). We note that lending
yields moderated by 50 bps to 10.2% (KS calc)—retail yields declined by about 70 bps to 12.2%
but wholesale lending yields improved by 10 bps to 8% during this period.
Deposit franchise impressive led by retail deposits
A high share of retail deposits (steady at about 65% levels) underpins HDFC Bank’s deposit
franchise. Retail deposits reported healthy growth in acquisitions, especially in corporate salary
accounts. As of March 2011, salary accounts contributed about 52% of the total savings
customers though its contribution to overall savings deposits is lower at about 31%. HDFC Bank
saw the top 13% of its savings customers contributing to 68% of its total retail deposits in
FY2011. Healthy presence in critical centers should give advantage in maintaining higher CASA.
Corporate NPLs rise in FY2011; LLP to rise on the back of higher slippages in FY2012-13E
In FY2011, retail NPLs (KS calc) declined to 1.1% (1.8% in FY2010) while wholesale NPLs (KS calc)
increased by 30 bps yoy to 1.4%. FY2011 saw lower write-offs as compared to FY2010 resulting
in lower loan-loss provisions. We estimate LLP to increase to about 1.1% by FY2013E as we expect
slippages to rise in the retail portfolio which are currently witnessing one of the lowest slippage
levels.
Valuations remain high; maintain ADD
We maintain our target price at `560 valuing the bank at 3.8X FY2013E book and 20X EPS.
We expect the premium multiples to be maintained given the limited risk to its
retail/working capital loan book, consistent earnings growth and comfort on the liability
franchise. Our ADD rating is driven by moderate for HDFC Bank and better risk return
tradeoff for other banks. We believe that the balance sheet is well-positioned to deliver RoEs
in the range of 18-19% levels and 28% EPS growth for FY2011-13E.
Differences in accounting resulting in higher earnings in US GAAP
We note that the following analysis includes significant differences in accounting methods
between Indian GAAP and US GAAP. Net profits under Indian GAAP are 3% above what
was reported under US GAAP in FY2011. This is mainly due to some key differences in
accounting for credit losses (including tax benefits), classification/valuation of investments,
income tax (including ESOPs and deferred tax benefits), loan origination fees/costs, and
derivative instruments, among others. On NPLs, the difference between gross NPLs of Indian
and US GAAP is higher by 20% levels primarily due to accounting of restructured loans and
selected exposures currently classified as standard in Indian GAAP.
Risk-adjusted NIMs to decline in FY2012-13E as pressure builds up on slippages
We expect the current risk-adjusted NIM (NIM less loan-loss provisions) performance to
moderate, especially in retail assets. We are building risk-adjusted NIMs to decline by about
15 bps each in FY2012-13E. FY2011 saw risk-adjusted NIMs at a near-term cyclical high.
Overall risk-adjusted retail NIMs improved by 120 bps to 7% while corporate risk-adjusted
NIMs improved by 40 bps to 1.2%. We note that lending yields have moderated by 50 bps
to 10.2% (KS calc). Retail assets saw lending yields decline by about 70 bps to 12.2% while
wholesale lending yields improved by 10 bps to 8%.
We expect mixed trends in lending yields for FY2012-13E though risk-adjusted NIM is
expected to decline during this period. Lending yields can improve in FY2012E: (1) Retail
asset composition is not witnessing any further change with the unsecured book maintained
at 20% of retail loans (as against a decline in earlier years) and low yielding housing loans
stabilizing at 13% of retail loans. Lending yields in these portfolios have stabilized with an
upward bias across products. (2) Wholesale loan yields have improved in recent quarters and
we expect further improvement in FY2012E as the full impact of recent rate hikes is
reflected in this portfolio.
Share of fixed rate loans and maturity pattern maintained in FY2011
Over the past few years, the overall proportion of fixed rate loans has been maintained at
70-75% levels as the bank has a higher share of fixed interest rate retail asset products. We
note that the overall proportion of fixed rate loans maturing in 1 year is about 40% of the
overall loans (53% of the fixed rate loans).
Corporate loans decline in FY2011: Mumbai is the bank’s focus area
Overall proportion of corporate loans (reported as per US GAAP) was at 41% (FY2010 was
at 45%), marginally different from that reported under Indian GAAP where the non-retail
loan proportion was at 50% (FY2010 was at similar levels). HDFC Bank continues to see a
majority of loans being originated (note that end use of these loans could be at different
regions) from the western regions. Mumbai and western markets combine accounts for over
45% of its overall loans. South and North, in line with business opportunity, continue to
remain the other key geographies for the bank while the acquisition of CBoP (Bank of
Punjab in the North and Lord Krishna Bank in the South) may have accelerated growth in
these regions. Its market share in Mumbai has doubled to 4.6% in the past five years driven
partly by higher corporate activity.
CASA ratio healthy—acquisition drive maintained; deposit costs to increase
HDFC Bank is at a comfortable standpoint from a deposit perspective. CASA ratio is
attractive at about 50%; acquisition of new clients driven by branch expansion is going at a
healthy pace and the bank has an attractive base of salary accounts.
FY2011 saw the costs of deposits for time deposits declining 100 bps to 6.4% as the repricing
exercise continued to favor banks. We expect these rates to increase as the recent
hikes in deposit rates will fully reflect in FY2012E. The deposit ageing profile of the bank’s
term deposits shows that nearly 75% the total term balances over `0.1 mn (86% of the
total term deposits) is less than 1-year.
Higher retail deposits and CASA ratio offer comfort on sharp rise in funding costs
Overall the higher proportion of retail deposits compared to its peers offer comfort against a
sharp and volatile change in deposit rates. Proportion of retail deposits have been steady at
about 65% levels (FY2010 was at 67%) over the past five years. This coupled with a high
CASA ratio (50% levels) offer comfort for the bank to maintain deposit costs at comfortable
levels despite a sharp rise in cost of term deposits rates. As mentioned earlier, the
combination of a strong and better granularity of deposit offers comfort in the bank
maintaining high CASA ratio.
Salary accounts: Contribution to overall retail deposits declined marginally
HDFC Bank continues to enjoy a strong franchise which has resulted in garnering a strong
share of corporate salary accounts. This has given a strong base of savings account growth.
As of FY2011, salary accounts contribute to 52% of its total savings customers, a ratio
which has remained consistent since FY2006. However, contribution to overall savings
deposits has declined in the past four years to 31% in FY2011 as compared to 38% in
FY2008. The average balances in these accounts have witnessed a marginal negative growth
in this period which has resulted in this decline compared to the bank’s overall balance
growth in savings account.
HDFC Bank saw the top 13% of its savings customers contributing 68% of its total retail
deposits in FY2011 as compared to 62% of retail deposits in FY2009. On an average, we
note that the top 10% of its savings customers contribute about 60% of the overall retail
deposits.
Asset quality remains strong; corporate book shows increase in NPLs
Segment-wise reporting is a bit more granular in Indian reporting but they lack historical
data. Overall gross NPLs is currently at about 1.3% (KS calc) in FY2011 (1.04% under Indian
GAAP in 1QFY12) compared to 1.9% in FY2009 and 1.5% in FY2010. In FY2011, retail
NPLs declined to 1.1% compared to 2.4% in FY2009 and 1.8% in FY2010 while wholesale
NPLs increased marginally by 30 bps yoy to 1.4%. Write-offs have reduced (implied as
provisions to be kept in the books when loan are reported), indicating lower pressure on
earnings. However, on the back of sharp rise in interest rates and slowdown in the economy,
we see loan-loss provisions to increase on the bank. We factor loan-loss provisions at 0.9-
1.1% of loans in FY2012-13E.
Limited concern on earnings growth: Multiple levers at play
We broadly maintain our earnings and expect 28% earnings CAGR for FY2011-13E.
FY2012E would see earnings growth driven by lower provisions and subdued revenue
growth (18% levels) on the back of margin moderation and lower fee income. FY2011 saw
the bank making higher provisions for (1) improving coverage ratio to 83% (from 78%), (2)
`6.7 bn (50 bps of loans) of floating provisions, (3) contingent provisions for MFI, change in
accounting for MTM (client related) and certain CBoP-related expenses.
The wholesale segment for HDFC Bank has been reasonably attractive with lower NPLs but
also with lower margins compared to retail segment. The average lending yields have fallen
sharply from FY2009 but banks have taken corrective measures in FY2011 by increasing
lending yields in recent period.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC Bank (HDFCB)
Banks/Financial Institutions
US GAAP report reaffirms the strong retail story. We analyze the US GAAP report
for HDFC Bank for FY2011. Key takeaways: (1) Risk-adjusted margins improved sharply
in FY2011, especially in retail. (2) Deposit profile remains strong led by higher share of
retail deposits primarily from its corporate salary account base. (3) Asset quality trends
appear healthy with sharp improvements, specifically in the retail segment. However,
valuations at 3.1X book and 17X FY2013 EPS delivering RoEs in the range of 18-19%
levels and EPS growth of 28% CAGR for FY2011-13E, appear to factor in most
positives; retain ADD.
Risk-adjusted margins at peak, will likely moderate
We expect the current risk-adjusted NIM (NIM less loan-loss provisions) performance to moderate,
especially in retail assets, by about 30 bps by FY2013E as slippages start to rise and pressure on
NIM continues. FY2011 saw risk-adjusted NIM at a cyclical high (retail margins improved by 120
bps to 7% and corporate risk-adjusted NIMs improved by 40 bps to 1.2%). We note that lending
yields moderated by 50 bps to 10.2% (KS calc)—retail yields declined by about 70 bps to 12.2%
but wholesale lending yields improved by 10 bps to 8% during this period.
Deposit franchise impressive led by retail deposits
A high share of retail deposits (steady at about 65% levels) underpins HDFC Bank’s deposit
franchise. Retail deposits reported healthy growth in acquisitions, especially in corporate salary
accounts. As of March 2011, salary accounts contributed about 52% of the total savings
customers though its contribution to overall savings deposits is lower at about 31%. HDFC Bank
saw the top 13% of its savings customers contributing to 68% of its total retail deposits in
FY2011. Healthy presence in critical centers should give advantage in maintaining higher CASA.
Corporate NPLs rise in FY2011; LLP to rise on the back of higher slippages in FY2012-13E
In FY2011, retail NPLs (KS calc) declined to 1.1% (1.8% in FY2010) while wholesale NPLs (KS calc)
increased by 30 bps yoy to 1.4%. FY2011 saw lower write-offs as compared to FY2010 resulting
in lower loan-loss provisions. We estimate LLP to increase to about 1.1% by FY2013E as we expect
slippages to rise in the retail portfolio which are currently witnessing one of the lowest slippage
levels.
Valuations remain high; maintain ADD
We maintain our target price at `560 valuing the bank at 3.8X FY2013E book and 20X EPS.
We expect the premium multiples to be maintained given the limited risk to its
retail/working capital loan book, consistent earnings growth and comfort on the liability
franchise. Our ADD rating is driven by moderate for HDFC Bank and better risk return
tradeoff for other banks. We believe that the balance sheet is well-positioned to deliver RoEs
in the range of 18-19% levels and 28% EPS growth for FY2011-13E.
Differences in accounting resulting in higher earnings in US GAAP
We note that the following analysis includes significant differences in accounting methods
between Indian GAAP and US GAAP. Net profits under Indian GAAP are 3% above what
was reported under US GAAP in FY2011. This is mainly due to some key differences in
accounting for credit losses (including tax benefits), classification/valuation of investments,
income tax (including ESOPs and deferred tax benefits), loan origination fees/costs, and
derivative instruments, among others. On NPLs, the difference between gross NPLs of Indian
and US GAAP is higher by 20% levels primarily due to accounting of restructured loans and
selected exposures currently classified as standard in Indian GAAP.
Risk-adjusted NIMs to decline in FY2012-13E as pressure builds up on slippages
We expect the current risk-adjusted NIM (NIM less loan-loss provisions) performance to
moderate, especially in retail assets. We are building risk-adjusted NIMs to decline by about
15 bps each in FY2012-13E. FY2011 saw risk-adjusted NIMs at a near-term cyclical high.
Overall risk-adjusted retail NIMs improved by 120 bps to 7% while corporate risk-adjusted
NIMs improved by 40 bps to 1.2%. We note that lending yields have moderated by 50 bps
to 10.2% (KS calc). Retail assets saw lending yields decline by about 70 bps to 12.2% while
wholesale lending yields improved by 10 bps to 8%.
We expect mixed trends in lending yields for FY2012-13E though risk-adjusted NIM is
expected to decline during this period. Lending yields can improve in FY2012E: (1) Retail
asset composition is not witnessing any further change with the unsecured book maintained
at 20% of retail loans (as against a decline in earlier years) and low yielding housing loans
stabilizing at 13% of retail loans. Lending yields in these portfolios have stabilized with an
upward bias across products. (2) Wholesale loan yields have improved in recent quarters and
we expect further improvement in FY2012E as the full impact of recent rate hikes is
reflected in this portfolio.
Share of fixed rate loans and maturity pattern maintained in FY2011
Over the past few years, the overall proportion of fixed rate loans has been maintained at
70-75% levels as the bank has a higher share of fixed interest rate retail asset products. We
note that the overall proportion of fixed rate loans maturing in 1 year is about 40% of the
overall loans (53% of the fixed rate loans).
Corporate loans decline in FY2011: Mumbai is the bank’s focus area
Overall proportion of corporate loans (reported as per US GAAP) was at 41% (FY2010 was
at 45%), marginally different from that reported under Indian GAAP where the non-retail
loan proportion was at 50% (FY2010 was at similar levels). HDFC Bank continues to see a
majority of loans being originated (note that end use of these loans could be at different
regions) from the western regions. Mumbai and western markets combine accounts for over
45% of its overall loans. South and North, in line with business opportunity, continue to
remain the other key geographies for the bank while the acquisition of CBoP (Bank of
Punjab in the North and Lord Krishna Bank in the South) may have accelerated growth in
these regions. Its market share in Mumbai has doubled to 4.6% in the past five years driven
partly by higher corporate activity.
CASA ratio healthy—acquisition drive maintained; deposit costs to increase
HDFC Bank is at a comfortable standpoint from a deposit perspective. CASA ratio is
attractive at about 50%; acquisition of new clients driven by branch expansion is going at a
healthy pace and the bank has an attractive base of salary accounts.
FY2011 saw the costs of deposits for time deposits declining 100 bps to 6.4% as the repricing
exercise continued to favor banks. We expect these rates to increase as the recent
hikes in deposit rates will fully reflect in FY2012E. The deposit ageing profile of the bank’s
term deposits shows that nearly 75% the total term balances over `0.1 mn (86% of the
total term deposits) is less than 1-year.
Higher retail deposits and CASA ratio offer comfort on sharp rise in funding costs
Overall the higher proportion of retail deposits compared to its peers offer comfort against a
sharp and volatile change in deposit rates. Proportion of retail deposits have been steady at
about 65% levels (FY2010 was at 67%) over the past five years. This coupled with a high
CASA ratio (50% levels) offer comfort for the bank to maintain deposit costs at comfortable
levels despite a sharp rise in cost of term deposits rates. As mentioned earlier, the
combination of a strong and better granularity of deposit offers comfort in the bank
maintaining high CASA ratio.
Salary accounts: Contribution to overall retail deposits declined marginally
HDFC Bank continues to enjoy a strong franchise which has resulted in garnering a strong
share of corporate salary accounts. This has given a strong base of savings account growth.
As of FY2011, salary accounts contribute to 52% of its total savings customers, a ratio
which has remained consistent since FY2006. However, contribution to overall savings
deposits has declined in the past four years to 31% in FY2011 as compared to 38% in
FY2008. The average balances in these accounts have witnessed a marginal negative growth
in this period which has resulted in this decline compared to the bank’s overall balance
growth in savings account.
HDFC Bank saw the top 13% of its savings customers contributing 68% of its total retail
deposits in FY2011 as compared to 62% of retail deposits in FY2009. On an average, we
note that the top 10% of its savings customers contribute about 60% of the overall retail
deposits.
Asset quality remains strong; corporate book shows increase in NPLs
Segment-wise reporting is a bit more granular in Indian reporting but they lack historical
data. Overall gross NPLs is currently at about 1.3% (KS calc) in FY2011 (1.04% under Indian
GAAP in 1QFY12) compared to 1.9% in FY2009 and 1.5% in FY2010. In FY2011, retail
NPLs declined to 1.1% compared to 2.4% in FY2009 and 1.8% in FY2010 while wholesale
NPLs increased marginally by 30 bps yoy to 1.4%. Write-offs have reduced (implied as
provisions to be kept in the books when loan are reported), indicating lower pressure on
earnings. However, on the back of sharp rise in interest rates and slowdown in the economy,
we see loan-loss provisions to increase on the bank. We factor loan-loss provisions at 0.9-
1.1% of loans in FY2012-13E.
Limited concern on earnings growth: Multiple levers at play
We broadly maintain our earnings and expect 28% earnings CAGR for FY2011-13E.
FY2012E would see earnings growth driven by lower provisions and subdued revenue
growth (18% levels) on the back of margin moderation and lower fee income. FY2011 saw
the bank making higher provisions for (1) improving coverage ratio to 83% (from 78%), (2)
`6.7 bn (50 bps of loans) of floating provisions, (3) contingent provisions for MFI, change in
accounting for MTM (client related) and certain CBoP-related expenses.
The wholesale segment for HDFC Bank has been reasonably attractive with lower NPLs but
also with lower margins compared to retail segment. The average lending yields have fallen
sharply from FY2009 but banks have taken corrective measures in FY2011 by increasing
lending yields in recent period.
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