hdfc systematix 02032009
TRANSCRIPT
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Betterearningsvisibility
We expect banks to facemajor challenges in FY10E and FY11E in terms ofma
headwindsviz.
slowdown
in
credit
demand,
rising
NPLs
and
margins
pressure.
In
t
scenario, banks which have ability to show quality growth in their profits a
withstandcurrentdownturnmoreeffectivelyandefficientlywouldmeritbetterrat
andHDFCBankisoneofthem.Inspiteof2xriseinNPLprovisionsandmoderateas
growth,HDFCBankwill recordearningsgrowthof22%CAGRover thenext2ye
drivenbysustainedmargins,stablefeeincomeandoptimisationofcostratios.
Highermarginstocompensateformoderatebusinessgrowth
Banksstrongretailfranchiseeandhighershareofdemanddepositswouldenablet
bank tosustain itsmarginsat4.6% levels in theensuingyearandFY11Ewhileoth
bankswillbe facing significantmarginpressure for the sameperiod.Given thehi
yieldingretailloansdominatingtheloanbookpie,advancesspreadsofthebankwou
remainhigh
at
7.5%+
levels
inspite
of
declining
by
40
50
bps.
Advances
and
deposits
thebankareexpected togrowatmoderate rateof23%CAGReachover thenext
years.We believe sustained highermargins of the bankwould offset formodera
businessgrowthwhileprotectingitsprofitability.
Corefeeincomeofthebank morestableinnature
Weexpectcore fee incomeof thebank togrowathealthy rateof17.5%CAGRo
FY0911E (v/s28%CAGRgrowthseenduringFY0608)due tomorestableoutlook
retailfeeincomewhichformsnearly75%ofthecorefeeincome.Retailfeeincome
thebank,whichiswidelydistributedacrossvariousproducts,wouldalsoimprovew
higherutilizationofunderleveragedbranchnetworkofCBoPbranches.
Unique and strong retail model will enable bank to withstand current downtu
moreeffectively
Givenwidedistributionof risk/ loansacross largenumberofproductsandclients
retailbusiness,retail loans,althoughexpectedtowitnesshigherdelinquencies leve
seemstobeunderlesserstressthanthecorporateloans.Nonetheless,weexpectgro
NPAsofthebanktoincreaseby2.6xinabsolutetermsoverthenext2yearsorto4
levels inFY11E from1.9%currently.On theotherhand,given thecompletionof t
merger/integrationprocess,webelievemergerbenefits (in termsofhigherbusine
generation,distributionof thirdpartyproducts,andgaininghigher lowcostdepos
fromtheCBoPbrancheswhichareplacedinCASArichnorthbelt)wouldberealized
currentfiscalwhichisbeingcompletelyignoredbythemarkets.
We
initiate
coverage
on
HDFC
Bank
with
ACCUMULATE
rating
Inourview,HDFCBankhasbetterearningsvisibilitythan itspeersandmeritsbet
rating than assignedby themarkets currently.Hence,we initiate coverageonHD
Bank with ACCUMULATE recommendation with a target price of Rs.1026 giv
upsidepotentialof15% from thecurrent levels;discounting itsFY10Ebookvalue
2.6x. AtCMP,thebankistradingat13.9xFY10earnings,2.3xFY10BVand2.5xFY
ABV.
November3,
HDFCBankLtd.NITIATING COVERAGEIndustry Banks - Private ACCUMULATE (CMP: Rs.89
SystematixInstitutionalResearc
March2,2009
ACCUMULATE
oomberg HDFCB IN
euters HDBK.BO
SE Group A
SE Code 500180
SE Symbol HDFCBANK
arket Data
arket Cap. (Rs.Mn.) 377682
are Cap. (Rs.Mn.) 4246
Wk High/Low 1575 / 800
g. Vol. (Weekly) 213255
ce Value (Rs.) 10
areholding Pattern on 31st December 2008) (%)
s millions) FY09E FY10E FY11E
erest Income 166344 201791 242379
75895 92857 113038
T 22484 27159 33308
S 53.0 64.0 78.4
341.1 394.5 462.4
E 16.8 13.9 11.3
BV 2.6 2.3 1.9
ABV 2.7 2.5 2.2
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TableofContents
nvestmentCase...........................................................................................................................................................................
Valuations&PriceTargetDerivation............................................................................................................................................
RelativeValuations......................................................................................................................................................................
ndustryOverview
........................................................................................................................................................................
ompanyIndepth.................................................................................................................................................................
AnOverview...............................................................................................
Journeyinbrief...................................................................................................................................................................................
EquityOutlook ...................................................................................................................................................................................
arningsOutlook&Financials......................................................................................................................................................
Q3&9MFY09ResultsAnalysis.....................................................................................................................................................
rofit&Loss.................................................................................................................................................................................
BalanceSheet..............................................................................................................................................................................
Ratios...........................................................................................................................................................................................
rofit&Loss(FY08figuresmergered)...........................................................................................................................................
BalanceSheet(FY08figuresmergered).........................................................................................................................................
Ratios(FY08figuresmergered).....................................................................................................................................................
Vinod [email protected]
(+91 22 6619 8257)
Jyoti [email protected]
(+91 22 6619 8187)
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INVESTMENTCASE
WeinitiatecoverageonHDFCBankwithACCUMULATEratingwithatargetpriceofRs.10
givingupsidepotentialof15% from thecurrent levels;discounting itsFY10Ebookvalue
2.6x. WeestimateHDFCBanksearningstogrowby22%CAGRduringFY0911EandNIIa
by22%CAGRforthesameperiod.Returnratiosofthebank isexpectedtoimproveto18
levelsin
FY11E
while
ROA
would
be
maintained
at
1.2%
levels.
Our ACCUMULATE rating on HDFC Bank is based on th
followingarguments:
Highermarginstocompensateformoderatebusinessgrowth
Inourview,banksstrongretailfranchiseandhighershareofdemanddepositswouldenab
thebanktosustainitsmarginsat4.6%levelsintheensuingyearandFY11Ewhileotherban
will be facing significantmargin pressure for the same period.Other key determinants
marginsareexplainedbelow
Banksadvances
spreads
would
remain
one
of
the
highest
in
the
industry
at
+7.5%
ov
thenext2years, inspiteof fallingby4050bpsdue todownward repricingofadvanc
anddeposits.Webelievecurrentpricingpowerenjoyedbythebankswoulddiminish
thenext12quartersandhence lendingrates isexpectedtomovesouthwardswitht
fall in the credit demand. However, a high yielding retail loan which is expected
dominate the loanbookpie (contributing60%of the total)wouldcushion theadvanc
spreadsofthebank.Inadditiontothis,bankenjoysdistinctadvantagetopriceitsloans
competitive rates in declining interest rate scenario, owing to its lowest funding co
withoutsacrificingonmarginsormarketshare
Onthe liabilityfront,pressureonthe fundingcostwouldeasemainlyduetodownwa
repricingof
term
deposits
and
also
with
the
improvement
in
the
low
cost
deposits
(CA
ratiotoimproveto44.7%inFY11Efrom39.6%currently).Weexpectsavingsdeposits
growathealthyrateowingtonarrowingofgapbetweensavingsandtermdepositsunl
seen in the past yearswhen the gapwaswidening leading to higher growth in te
deposits. Also, CASA would improve as bank would be leveraging on sizeable und
utiliseddistributionnetworkofCBoP,whoseefficiency inaccruingCASAdeposits ison
fourthofHDFCBankcurrently.Whilethebankisalreadyseeinghighercustomerintere
fromCBoP branches due to its powerful brand. Furthermore, bulk deposits rates (b
deposits formnearly12%of totaldeposits)would see sharper correction aswholes
deposits rates have collapsed bymore than 300400 bps. Interestingly, from the p
severalyears,thebankhasbeenable tomaintain itsmarginsat4%+ irrespectiveoft
interestratecycleoftheeconomy.
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Source: Company, Systematix Institutional Research
Webelievesustainedhighermarginsofthebankwouldoffsetformoderatebusinessgrow
giving somecushion to itsprofitability. Inourview,otherbankswillhave to increase th
business to sustain theirprofitability,whichwill come ataveryhigh risk in current tim
otherwiselower
margins
and
lower
business
would
result
in
double
blow
on
their
profits.
thisscenarioHDFCBankiswellplacedasitreliesonitshighermarginstoprotectitsearnin
growth inspiteofmoderatebusinessgrowth.Weexpectadvancesanddeposits togrow
23%eachoverthenext2years.
Fig 3: HDFC Bank: Business to grow at moderated pace
Source: Company, Systematix Institutional Research
Fig 1: The bank would be able to maintain its marginsintou h times
Fig 2: HDFC Bank utilizes its capital in most efficient wayreflected from its highest margins
Fig 4: ICICI Bank, Axis Bank have been very aggressive in growtheir business over the last 3 years..
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Source: Company, Systematix Institutional Research
Fig 7: HDFC Bank: 75% of the core fee income comes from retail assets.while 25% of the retail fee income comes from thirparty distribution products
Source: Company
Uniqueandstrongretailmodelwillenablebanktowithstandcurrent
downturnmoreeffectively
Inourview,riskrewardratiohasturnedmore favourable forretailbankingthancorpora
banking.GiventheearlybeginningofretailNPLcycle,bankshadalreadyturnedcautiousa
adopted protective measures like reducing the exposure to unsecured loans, tighten
lendingnorms,increasedprovisioncover,readjustedpricingofloanstofactorhigherriska
hence
additional
hit
on
profitability
from
this
segment
is
limited.
On
the
other
hand,
given
tdeclining interest ratescenarioand risingNPLs (whichare largeand lumpy innature), ri
reward ratiodoesnot seems tobe favouarable in corporatebanking in current times.W
believebankshavinghigherexposuretocorporateloanswillhavemorevulnerabilitytoth
profits.WebelieveHDFCBankiswellplacedinthisscenarioasitsbusinessmodelisbased
strongretailnetwork.
Fig 5:HDFC Bank: Share of fee/total to remain healthyat 22% levels
Fig 6: Core fee income to grow at 17.5% CAGR over thenext 2 years
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Fig8:Sectorwisebreakupoftheloanbookofprivatebanks
Source: CompanyNote: Above figures are for the period ended Dec08
Assetqualityofthebankshowingsignsoflessstrain
Givenwidedistributionof risk/ loansacross largenumberofproductsand clients in ret
business,retailloans,althoughexpectedtowitnesshigherdelinquencieslevels,seemsto
underlesser
stress
than
the
corporate
loans.
In
this
scenario,
HDFC
Bank
is
better
placed
as
hasmorethan60%ofloansinretailsegment.Moreover,thebankcaterstohighendmidd
classsegment (unlike ICICIBankwhichcatersto lowmiddleclasssegmentwithsmall tick
size loans) and also has more stringent credit appraisal process, which further reduc
probabilityofunwarranteddeterioration in itsassetquality. Ontheotherhand,corpora
bookofthebankislikelytowitnesshigherdelinquencieswiththeinfluxofeconomicslum
and dwindling corporate profitability. Management too guided that SME book of t
erstwhileCBoP(forming20%oftotal)iswitnessingearlysignsofdeterioration.Nonethele
weexpectgrossNPAsofthebanktoincreaseby2.6xinabsolutetermsoverthenext2yea
orto4%levelsinFY11Efrom1.9%currentlywhiletheprovisioncoverwoulddeclinefro
70%currently
to
60%
in
FY11E.
Wehavedonevitalassignmenttoascertaintherankingsofthebanksbasedonassetqual
parameter by assigning different weightage to parameters like Tier I capital, provisi
coverage ratio, current asset quality, shareof unsecured loans in total advances, share
corporate and sensitive sectors in total advances. A higher ranking of the bank indicat
betteroutlookofthebankvisvisitspeersintermsofassetquality.Basedonouranalys
wearriveata conclusionthatloanportfolioofHDFCBankisbetterplaced(orshowingsig
oflessstrain)thanICICIBankandAxisBank.
Table 2: Assessing ranking of private banks based on their asset quality parameter
Weightage HDFC Bank Axis Bank ICICI BaCAR - Tier I 20% 1.1 1.0
Provision coverage ratio 10% 0.7 0.5 0
Current asset quality 15% 1.3 1.5 0
Share of unsecured loans in total loan book 20% 1.3 2.0
Share of corporate loans in total 20% 1.5 0.3
Share of sensitive sectors in total loan book 15% 1.3 0.8
Total Score 100% 7.1 6.1 6
Note: A higher ranking of bank indicates better outlook of the bank vis--vis its peers in terms of asset quality
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Fig 9: HDFC Bank has the higher provision cover than ICICI Bank and Axis Bank
Source: Company, Systematix Institutional Research
Fig 10: HDFC Bank: Sector-wise break up of its funded exposure Fig 13: HDFC Bank: break up of retail loans
Source: Company
Note: Above figures are for the period Dec08
Fig 11: HDFC Bank: NPLs to rise in line with economic downturn
Source: Company, Systematix Institutional Research
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VALUATIONSBANKDESERVESBETTERVALUATION
THANASSIGNEDBYMARKETSCURRENTLY
HDFCBankisoneoftheexceptionalbankstodeliverconsistentandstrongperforman
overtheyears irrespectiveof interestratecycleoftheeconomy. Incurrenttimesto
webelievemanagementwouldbe able todeliver.Wearepositiveon the long te
growthprospects
of
the
bank
for
the
reasons
like
Bankwouldbeabletomaintainitshighmarginsoverthenext2years,whereoth
bankswould be facing significantmargin pressure,whichwould compensate f
moderatebusinessgrowth
Corefeeincomeofthebanktogrowatahealthyrate
CASAratiotoimprove
Mergerbenefitsexpectedtorealizeincurrentyear
Its strong deposit franchisee and unique retailmodelwould enable the bank
withstandthedownturnmoreeffectively.
Inspiteof2x rise in theNPLprovisions,earningsof thebankwouldgrowat2
CAGRoverthenext2years.
Table 3: HDFC Bank: Break-down of ROA
(As a % of average assets) FY07 FY08 FY09E FY10E FY1
Interest Income 8.1% 9.0% 10.3% 9.6% 9.5
Interest expenses 3.9% 4.4% 5.6% 5.2% 5.0
NII/avg assets 4.2% 4.7% 4.7% 4.4% 4.4
Non-NII/avg. assets 1.8% 2.0% 1.8% 1.6% 1.5
Total Income 6.1% 6.7% 6.6% 6.0% 5.9
Fee income/avg. assets 1.6% 1.5% 1.5% 1.3% 1.3
Operating exp/avg. assets 2.9% 3.3% 3.5% 3.0% 2.9
Operating profit/avg assets 3.1% 3.4% 3.1% 3.0% 3.0
Provisions/avg. assets 1.1% 1.3% 1.0% 1.1% 1.2
PBT/avg. assets 2.0% 2.0% 2.0% 1.9% 1.9
Tax/avg. assets 0.6% 0.6% 0.7% 0.6% 0.6
PAT/avg. assets 1.4% 1.4% 1.4% 1.3% 1.3Source: Company, Systematix Institutional Research
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PRICETARGETDERIVATIONInthepast,thebankhasusuallytradedat44.5xoneyearforwardBVmultiplewhere
valuationmultiplewasat2.5xduringFY03/04.Surprisingly,currentvaluationsoftheba
are lower than observed in FY0304 period. In current times bankswhich are able
withstandcurrentdownturnmoreeffectivelywhilemaintainingtheirprofitabilitydeser
better rating. In our view,HDFC Bank has better earnings visibility than its peers a
hencemerits
better
rating
than
assigned
by
the
markets
currently.
We
initiate
covera
onHDFCBankwith ACCUMULATE ratingwitha targetpriceofRs.1026givingupsi
potentialof 15% from the current levels; discounting its FY10E book value by 2.6x.
CMP,thebankistradingat13.9xFY10earnings,2.3xFY10BVand2.5xFY10ABV.
Table 4: Relative Valuations
P/E (x) P/BV (x) ROE (%) ROA (%)
(Rs in crores) Price Mcap FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY1
ICICI Bank 328 36460.2 9.4 7.6 0.7 0.7 8.2 9.6 1.0
Axis Bank 348 12485.8 8.7 6.9 1.3 1.1 15.5 17.1 1.1
Kotak Bank 259 9185.6 12.8 11.3 1.4 1.2 11.1 11.7 1.9
HDFC Bank 890 37768.2 16.8 13.9 2.6 2.3 16.6 17.4 1.2 Yes Bank 51 1523.5 5.1 4.7 0.9 0.7 20.5 18.1 1.5 Source: Bloomberg estimatesNote: Figures of HDFC Bank and Yes Bank are Systematix estimates
RISKTOOURTARGETPRICE
Ifrecoveryoftheeconomytakeslongerthanexpectedi.e.beyondH2FY10/H1FY11then
wouldposegreaterrisktotheeconomyandsectoraswell
Higherdefaultsthanestimatedinourprojections
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INDUSTRYOVERVIEW
WeexpectbankstofacemajorchallengesinFY10&FY11intermsofmacroheadwindsv
slowdownincreditdemand,risingNPLsandmarginpressure.Hencewebelievebestearn
seasonisbehindusandearningsgrowthtomoderateconsiderablyinFY10&FY11inlinew
theslowdownintheeconomy.Nonetheless,thereishigherprobabilityoflowerinterestrat
thanseeninthepast23yearswhichwouldtrulydictatetheprofitabilityofthebanksgo
ahead.Westronglybelievethebanksthatareabletowithstandthesemacroheadwinds
current cyclewouldemerge aswinners.Hencewepreferbanks that enjoy strong liabil
franchise,enjoyhighershareofretailloans intotal loanmix(ascorporate loanbookoft
banksposeshigherNPLrisk),highermarginsandbetterprovisioncoverageratio.
Assetgrowthtoslowdown
DuringFY056MFY09,wewereinacyclewhichwascharacterizedbystrongeconomygrow
huge investments and capex plans effected by corporates, robust credit growth, high
lending rates followed by higher deposit rates, rising demand for money leading
inflationarypressures.
We
believe
this
cycle
is
expected
to
reverse
now
exemplifying
slow
economy growth, deferment of capex plans by corporates leading to slackening of cre
demand,loweringoflendingratesanddepositratesbybankstorevivecreditdemand.Ass
growth of the banks is set to entermoderate growth phasewhichwill be influenced
slower creditofftake.Weexpect credit growth to fall to1518% levels in FY10& FY11
against 30%+ growth recorded during FY0507 due to weakening of credit demand.
observedinthepast,creditgrowthtorealGDPgrowthratioisnearly3times,ifGDPgrow
fallsto56%levels,inthatcaseCreditofthebanksislikelytogrowby1518%levels.
Fig 12: Credit growth to follow slower economy growth
Source: RBI
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able 5: System credit, deposit and investment growth
s bn) Mar-00 Mar'01 Mar'02 Mar'03 Mar'04 Mar'05 Mar'06 Mar'07 Mar'08 Q1FY09 Q2FY09 Q3FY
an growth Y-o-Y (Rs bn) 747 665 613 1537 1252 2712 3720 4201 4103 538 1394 9
an growth Y-o-Y (%) 21.4 15.7 12.5 27.9 17.7 32.7 33.8 28.5 22.8 26.1 25.6 23
eposits growth Y-o-Y (%) 1214 1547 1346 1957 2191 2239 3210 5066 5979 1161 1339 10
eposits growth Y-o-Y (%) 16.9 18.4 13.6 17.3 16.6 14.5 18.2 24.3 23.0 21.9 20.2 20
vt. growth Y-o-Y (Rs bn) 719 406 874 1076 1218 678 -236 646 1806 426 -281 9
vt. growth Y-o-Y (%) 28 12 24 24 22 10 -3 9 23 19 9
ovt. Securities growth Y-o-Y (Rs bn) 722 423 879 1098 1219 693 -214 664 1825 431 -281 9
atios
D ratio 51 49 49 53 54 62 71 73 72 71 73
D ratio 39 37 40 42 44 43 35 31 30 31 29
cremental CD ratio 62 43 46 79 57 121 116 83 69 46 104
cremental ID ratio 59 26 65 55 56 30 -7 13 30 37 -21 urce: RBI
Marginstoshrink
Goingahead,weexpectmarginstocomeunderpressurewiththeincrementaldepositsbe
channelized into investments rather than advances as the banks enjoy lower spreads
formerthan
the
latter.
Also,
in
the
recent
past,
banks
have
cut
lending
rates
more
sharply
150200bpsasagainstthedepositcutof50100bpsonly leadingtomorepressureont
margins.Wereckonthat lendingrateswouldbefurtherslashedby150200bps inthene
oneyearfollowedbysimilaramountofdepositcuttoo.Withthechangeinthelendinga
depositrates,advanceswhichformlargerpartofassetsgetrepricedatnewrateswhereas
liabilitysideonlyincrementaldepositswouldgetrepricedatnewratesleadingtoquickfal
the margins. In Q3FY09, the banks enjoyed significant pricing power reflected fro
improvement in themargins inspite of PLR cut effected by banks.We expect this pric
powerof thebanks todiminish innext12quarterswith the slackeningofcreditdeman
Additionally, inthedeclining interestratescenario, investmentsofthebankgetrepriced
lowerrates
leading
to
falling
investment
yields.
In
our
view,
slowdown
in
credit
dema
would pose greater risk to themargins at that point of timewemay see considera
declineintheadvancesyieldsimplyingsupplyexceedingthedemand.
Table 6: Loan yields of the banks have peaked out
(%) FY06 FY07 FY08 Q1FY09 Q2FY09 Q3FY
SBI 7.6 8.3 9.3 9.3 9.8 10
ICICI Bank 8.2 9.4 10.7 10.2 10.2 1
HDFC Bank 8.9 10.6 12.6 12.0 12.3 13
Axis Bank 8.1 9.1 9.8 10.3 10.9 1
Yes Bank 8.6 9.7 11.8 12.8 13.7 14Source: Company, Systematix Institutional Research
Note: Margins calculated on average quarterly balances
Table 7: Cost of funds of the banks
(%) FY06 FY07 FY08 Q1FY09 Q2FY09 Q3FY
ICICI Bank 5.0 6.0 7.0 6.6 6.7
HDFC Bank 3.4 4.2 4.7 5.1 5.4 6
Axis Bank 4.4 5.1 5.2 5.7 6.0 6
Yes Bank 4.5 6.0 7.5 7.6 8.7 9Source: Company, Systematix Institutional Research
Note: Margins calculated on average quarterly balances
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Table 8: Margins of the banks would show reverse trend now
(%) FY06 FY07 FY08 Q1FY09 Q2FY09 Q3FY
ICICI Bank 2.6 2.4 2.3 2.3 2.4 2
HDFC Bank 4.4 4.5 4.6 4.4 4.6 4
Axis Bank 2.6 2.7 2.7 3.0 3.2 2
Yes Bank 3.3 2.3 2.5 2.8 2.8 2Source: Company, Systematix Institutional Research
Note: Margins calculated on average quarterly balances
RiseinNPLisunavoidable
Rise inNPLscurrently isnothingbutoutcomeofhighcreditgrowthphaseobserveddur
last34years.Undoubtedly,thebankswillshowriseintheNPLswiththeinfluxofeconom
slumpanddwindlingcorporateprofitability.Bankshavinghighexposuretosensitivesecto
like textiles, auto& auto ancillaries, gems&jewelry, real estate sector etc. are likely
witnesshigherNPLs.Q3FY09resultsof thebanksrevealthatpaceofdeteriorationofass
qualityisfaster.SpecialregulatorybenefitsallowedbytheRBIwillonlypostponetheNPAs
thenextfiscalresultinginhigherNPLlevelsinFY10althoughthenumberswouldbesmal
inFY09. Inourview,NPLsandeconomicgrowthof thecountryare indirectlycorelated
eachother
hence
recovery
in
the
economic
cycle
later
than
expected
could
pose
further
r
toNPLsandprofitabilityof thebanks. In the last5years,grossNPAshavecomedown
approx70%(in%terms)from7.2%inFY04to2.3%inFY08 fortunatelycurrentriseisfrom
lowerbase.
able 9: Gross & Net NPAs of SCBs, PSBs and private banks
%) Gross NPAs/Gross Advances Net NPAs / Net Advances
FY04 FY05 FY06 FY07 FY08 FY04 FY05 FY06 FY07 FY
CBs 7.20 5.20 3.29 2.51 2.25 2.90 2.00 1.22 1.01 1
SBs 7.79 5.53 3.64 2.66 2.23 2.99 2.06 1.32 1.05 0
ivate Banks 5.84 3.77 2.45 2.17 2.47 2.84 1.85 1.01 0.96 1
urce: RBI
Higherprobabilityoflowerinterestrates
There ishigherprobabilityof interest rates remainingbenignor lowerover thenext12
monthsthanseeninthelast23years,inspiteofhighergovernmentborrowings.However,
theshortterm,therecouldbetemporaryspikesininterestratesemanatingfromhighergo
borrowings. In our view, fundamentally an economywhich is slowing down cannot ha
higher inflation or higher interest rates owing to overall demand slump in the econom
Hence,webelieve interest ratescould followthe lower inflation figuresasobserved int
past.Additionally,liquiditywouldalsoincreaseasbankswouldbeparkinghigheramount
deposits in investments than credit partially outweighing the impact of higher go
borrowings.Hence,
the
lower
interest
rates
may
enable
the
banks
to
book
higher
treasu
gains which could partially offset for other negative factors like higher NPLs, dwindl
margins,slowerassetgrowthandincreasedloanlossprovisions.
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Valuations
Currentlymajority of the banks are trading at FY03 valuations. Although, the banks a
tradingatattractivevaluationsbutmoderateearningsgrowthandhigherdownside risk
earningsdue to lackofvisibilityonactual rise inNPLswouldkeep theperformanceof t
stocks subdued.However,we believe bankswhich are able to retain their profitability
tough timeswoulddeservebetter ratings.Hence,potentialwinners in thesectorwould
bankswhich
have
ability
to
show
quality
growth
in
profits
and
are
able
to
ride
out
curre
macroheadwindssmartly.Wepreferbanksthatenjoystrong liabilityfranchise,havehigh
shareofretailloansintotalloanmix(ascorporateloanbookofthebanksposeshigherN
risk),highermarginsandbetterprovisioncoverageratio.
Table 10: Valuations of the banks across different rate cycle
FY03-FY04 Peak valuations Current Valuatio
SBI 0.6-1.3 >1.8
ICICI Bank 1-2 >2.5
PNB 0.6-1.4 1.6 0
Axis Bank 1-2 >4
HDFC Bank 2.5 >4.5 BOB 0.6-1.4 1.5 0
Bank of India 1.0-1.4 1.6-1.7 0
Union Bank 0.6-1.4 1.4 0
OBC 1-1.8 1.5-1.6 0
Canara Bank 1.0-1.4 1.4 0Source: Systematix Institutional Research
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COMPANYIN-DEPTH
Incorporatedin1994,HDFCBankisaprivatesectorbankpromotedbyHousingDevelopme
Finance Corporation (HDFC) Ltd premier housing finance companyof India. In 2000, t
bankhadacquiredTimesBankwhichgavethebankgreatermuscleintermsofretailandm
marketcorporateclientele.In2004,thebankenteredintomortgagearrangementwithHD
to
sell
its
home
loan
products
for
which
the
bank
is
paid
the
sourcing
fee
of
0.7
1%
of
tapprovedanddisbursedloans.Intheabovearrangement,HDFCLtdprovidescredit,legala
technicalappraisalofloansanddoesprocessingandcollectionoftheloanswhereastheba
isresponsibleforsalesoriginationanddistributionoftheproducts.HDFCLtd isobligated
sellbacktothebankupto70%ofthefullydisbursedhomeloanssoldbythebankthrought
issueof themortgagepass throughsecuritiesat theunderlyinghome loanyields lessa f
(~1.5%)paidtoHDFCltdforadministrationandservicingoftheloans.Currently,thebankh
networkof1412branchesandemployeestrengthofmorethan52000.HDFCBankhasshow
one of themost consistent performances since the last 10 years and continues to gro
bottomlineat30%+.Recently,thebankacquiredCenturionBankofPunjabwhichincreas
itsassetbaseby19%andbranchnetworkby52%.
Journeyinbrief
ig 13: HDFC Banks milestone
ource: Company
Table 11: Equity History and Outlook
Date Total No. of Total amount Equity Equity Issues Details
Shares raised Capital Dilution
(in mn) (Rs. in mn) (Rs. in mn) (%)
May 1995 50.0 500 2000 - IPO @Rs.10 per share
March 2000 23.5 NA 2235 11.7 Merger of HDFC Bank with Times Bank ltd in share swap ratio of 1:5.75
March 2000 19.8 1861 2433 8.9 Allotment of shares to promoters & strategic investors @ Rs 94 per share
ul 2001 37.4 7803 2812 15.6 Allotment of 12.5 mn ADS to investors @ Rs.208.5 per share
an 2005 22.9 12750 3099 10.2 Allotment of ADS @ US$ 39.26 (Rs.556 per share)
un 2007 13.6 13901 3332 7.5 Preferential Issue allotted to HDFC Ltd. @ Rs.1023.5 per shareul 2007 19.8 24632 3530 5.9 Allotment of ADS of 6594504 @ Rs.1245 per share
un 2008 69.9 NA 4246 20.3 Merger of HDFC Bank with CBoP in share swap ratio of 1:29
ource: Capitalineote: Each ADS represents 3 equity shares
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Fig 15: BankhasgeneratedaverageROEof~20%inthelast11years.
Source: Company
ig 16: Assetsizehasincreasedby8timesinlast8years. Fig17:whileprofitshaveincreasedby7times
ource: Company
HDFCBank-CBoPmergerbenefitsyettoberealised
In Q1FY09, HDFC Bank acquired Centurion Bank of Punjab (CBoP) for a consideration
approxRs.95bnwhichdiluted itsequitycapitalby19.8%.Theboardapprovedsharesw
ratioof1:29 i.e.valuingCBoPat5.3xFY08bookvalue.Themost importantdriving fact
according to us, for merger with CBoP, was to gain considerable size and scale a
accordingly,postmerger,totalassetsofHDFCBankincreasedby19%andbranchnetwork
52%.Webelievemergerhasgivenbankmuchneededunderleverageddistributionnetwo
oftheerstwhileCBoPimprovingitslongtermgrowthvisibility.Sofar,thebankhaseffect
timelyexecutionofmergerprocess intermsofHR,people,treasuryandretailassetswh
wasperceivedaskeychallengesbythemarketsearlier.
In the current fiscal, incremental business growth have not come from erstwhile CB
branches since the bank was engaged in accomplishing and realigning the above sa
processes and fetching common IT platform for both banks.Given the completion of t
merger/integration process, we believe merger benefits (in terms of higher busine
generation,distributionofthirdpartyproducts,andgaininghigherlowcostdepositsfromt
CBoPbrancheswhichareplacedinCASArichnorthbelt)wouldberealizedincurrentfisca
whichisbeingcompletelyignoredbythemarkets.
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Table 12: Merger Analysis Below figures are for the period 9MFY08
Rs in Millions) HDFC Bank CBoP Combined entity Growth w.r
merger (%
Profit/Loss Account
NII (Rs) 35858 4997 40855 13
Other income (Rs) 17338 4718 22056 27
Total income (Rs) 53196 9715 62911 18
Operating expenses (Rs) 26429 6641 33070 25
Operating profit (Rs) 26767 3074 29841 11
Net profit (Rs) 11191 1167 12358 10
Operational efficiency
Cost/Income ratio (%) 49.7 68.4 52.6
Balance Sheet figures
Loan book (Rs)
Retail advances (Rs) 375490 90230 465720 24
Wholesale advances (Rs) 338370 60610 398980 17
otal advances (Rs) 713870 150840 864700 21
Share of retail advances in total advances (%) 53 60 53.9
otal deposits (Rs mn) 993870 207100 1200970 20
CASA deposits (Rs mn) 486000 50740 536740 10
Key ratios
CASA ratio (%) 48.9 24.5 44.7
CASA deposits/per branch (Rs mn) 645 129 468
otal deposits/ per branch (Rs mn) 1320 530 1046
Asset quality
Gross NPAs (Rs) 8670 5637 14306 65Net NPAs (Rs) 2798 2544 5342 90
Gross NPAs (%) 1.2 3.7 1.7
Net NPAs (%) 0.4 1.7 0.6
Size
Number of branches (No.) 754 394 1148 52
Number of ATMs (No.) 1906 452 2358 23
Number of employees (No.) 37836 7500 45336 19Source: Systematix Institutional Research
Banksenjoysnoteworthyadvantagesfromitsstrongliabilityfranchise
Thebank
has
higher
proportion
of
CASA
deposits
in
total
deposits
at
40%
levels
as
it
leverag
onitsstrongandvastretailfranchise.Thisenablesthebanktogarnermorestablesource
funds at lower cost. Resultant, the bank enjoys one of the highestmargins (+4%) in t
industryanditisabletosustainthesemarginseveninthedeclininginterestratescenario.
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EARNINGSOUTLOOK&FINANCIALS
Assetgrowthtomoderatein-linewiththeeconomicdownturn
DuringFY0508, totalassetsof thebank recorded stronggrowthat36.9%CAGRdriven
highercreditgrowthwhichwasinfluencedbyfavourableeconomicoutlook.Goingahead,w
believebankswouldrefrain fromgrowingtheirassetsatrapidpacegiventheworsening
economicoutlookwhichwilladdfurthertotheirrisk aversebehavior.Hence,weexpectto
balancesheetsizeoftheHDFCBanktogrowatmoderatedpaceof22%CAGRduringFY0
11E.Webelievethisstrategyofmoderatedassetgrowthwouldbeprofitableforthebank
unwarrantedhighgrowthwouldcomeataveryriskiercost.
Fig 18: Total asset size & its growth
Source: Company, Systematix Institutional Research
NIIofthebank,whichisatlesserriskthanitspeers,togrowatmodera
pace
Inthepasthighgrowthcycle,stronggrowthinNIIwastriggeredbyhigherCDratio,healt
loan growth and improvingmargins.We believe, in the current cycle, NII growth wou
moderateemanatingfromslowercreditofftake,diminishingmarginsanddecline intheC
ratio. Sustained healthymargins andmoderate credit growth would result in reasonab
growth inNIIof thebankat22%CAGRduringFY0911Ev/s42.7%CAGRgrowthseenov
FY0508period.Inourview,otherbanksareatahigherriskofsharpfallintheNIIthanHD
Bankas
the
latter
can
still
rely
on
higher
margins
to
restrict
fall
in
its
NII
which
does
n
holdstrueforotherbanks.
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Fig 19: NII & its growth
Source: Company, Systematix Institutional Research
Earningstogrowby21.7%CAGRduringFY09-11E
Inascenariowherethebanksearningsareexpectedtocollapsesharply,HDFCBankisw
placed as it has better earnings visibility than its peer group. Inspite of 2x rise in N
provisionsandmoderateassetgrowth,HDFCBankwillrecordearningsgrowthof22%CA
overthenext2years(i.e.bottomlinetogrowby41%incurrentfiscal,20.8%inFY10Eand
22.6%inFY11E)drivenbysustainedmargins,stablefeeincomeandimprovementintheco
ratios. Inourview,earningsgrowthofHDFCBankwould remainoneof thehighest in t
industry.Additionally,keyfinancialratiosvizROEandROAofthebankareexpectedtoretu
to
pre
merger
levels.
Fig 20: PAT & its growth
Source: Company, Systematix Institutional Research
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Fig 21: HDFC Bank: ROE&ROA
Source: Company, Systematix Institutional Research
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9M&Q3FY09RESULTSANALYSIS
Bankpostedgoodresultsintoughtimes netprofitgrewby44.8%yoytoRs.6217mn
Q3FY09andby44.2%yoytoRs.16141mnfor9MFY09.Keyhighlightsofthequarterwe
bankturnedriskaverse in lendingresulting inchange inthebalancesheetcompositi
withmoreemphasisoninvestmentsthanadvances,marginsexpandedwhileassetqual
pressurestillremains.
Investmentsdrivethebalancesheetgrowth
In Q3FY09, bank turned cautious in growing its assets book aggressively considering t
systemic risks. Hence, it adopted a strategy of slowing down advances growth wh
deployingfundsintoinvestments.Banksadvancesdeclinedby3%qoqtoRs.987.8bnd
to degrowth in the corporate loan book (10.7% qoq)while retail advances continue
grow.Banksinvestmentsrecordedexponentialgrowthof43%qoqtoRs.633.4bn.
Table 13: The bank has taken conscious effort to decline its exposure towards CV, two-wheeler and loans against securities.
(Rs in billions) Dec'08 Dec'07 y-o-y (%) Sep'08 q-o-q
Auto 151.0 104.0 31.1 135 1
CVs 83.0 56.0 32.5 89.5 -
Two Wheeler 21.0 17.0 16.7 22.4 -6
Personal Loans 89.0 61.0 31.5 82.0 8
Business Banking 135.0 77.0 43.0 127.5 5
Loans against sec 7.0 12.5 -78.6 10.0 -30
Credit cards 41.0 28.0 31.7 39.0 5
Others 69.0 22.0 68.1 78.6 -12
Total 596.0 378.0 36.6 584.0 2
Source: Company
Fig 22: HDFCBank:Advancesshoweddegrowthwhileinvestmentsgrewsharply
Source: Company
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Fig 23: HDFCBank:Balancesheetgrowthshowingsignsofcoolingoff
Source: CompanyFig 24: HDFC
Bank:
Reversal
in
the
trend
of
incremental
C
D
and
ID
ratio
in
Q3FY09
Source: Systematix Institutional Research
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Table 15: Core fee income recorded strong growth despite troubled times
Rs in mn) Q3FY09 Q3FY08 (% y-o-y) (% share Q2FY09 (% q-o-q) (% sha
Q3FY09) Q2FY0
Comm, exch. and brokerage 6440 4601 40.0 68.6 5873 9.7 9
oreign exchange & derivative revenue 628 742 -15.4 6.7 675 -7.0 10
oss on revaluation of investments 2321 -1315 -276.5 24.7 -156 NA -2
Others 5 1446 -99.7 0.1 39 -87.2 0
Total 9394 5474 71.6 100.0 6431 46.1 100Source: Company
Marginsimproveasbanksexercisedtheirpricingpower
Advances yields improved appreciably (on qoq) across the sector as banks took t
advantage of extraordinary periodwhich prevailed inQ3FY09.We believe current pric
powerenjoyedbythebankswouldstarttodiminishinthenext34quarters.Advancesyie
ofHDFCBankincreasedby98bpsonsequentialbasisresultinginmarginimprovemento
bpsqoqto4.68%inQ3FY09.Atthesametime,costoffundsofthebankalsoincreased
67bpsonqoqto5.43%inQ3FY09whichisexpectedtoeaseinfourthquarterduetoamp
liquidity
in
the
market.
Table 16: Sharp improvement in the advances yields boosted margins
%) Q3FY09 Q3FY08 (Change Q2FY09 (Chan
y-o-y) q-o-
Yield on advances 13.28 11.18 2.11 12.30 0
Yield on investments 7.65 7.51 0.14 7.98 -0
Cost of funds 6.10 4.47 1.63 5.43 0
Cost of earning assets 5.88 4.28 1.61 5.23 0
Yield on assets 10.56 9.05 1.52 9.83 0
NIM 4.68 4.77 -0.09 4.60 0Source: Systematix Institutional Researchote: Above figures are calculated on average quarterly balances
CBoPloanbookaccentuatedNPLsofthebank
Postmerger,NPLsofthebankareonupwardtrendduetoseasoningoftheCBoPloanboo
however, they are stillwithin themanageable levels.GrossNPLs of the bank increase
Rs.2355mnor0.3%to1.9%inQ3FY09asagainst1.6%inthelastquarter.Provisioncovera
ratioofthebankimprovedto68%from65%inthelastquarter.ThebankhasmadeNPAa
standardassetprovisioningofRs.4.65bninQ3FY09v/sRs.3.37bninthelastquarter.
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Fig 26: Delinquencylevelsincreasingatfasterpaceinlinewiththeindustrywidetrend
Source: Company, Systematix Institutional ResearchFig 27: Although
asset
quality
deteriorating
still
it
is
better
than
peers
Source: Company
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Q3&9MFY09RESULTSANALYSIS
Year ending March, Rs in millions) Q3FY09 Q3FY08 yoy (%) 9MFY09 9MFY08 yoy (
nterest earned 44685 27269 63.9 120814 71588 68
Interest/discount on advances/bills 33380 18673 78.8 90396 49578 82
Income on investments 10282 7702 33.5 28816 19944 44
Interest on bal. with RBI 1005 881 14.1 1578 2029 -22
Others 18 14 29.3 25 37 -32
nterest expenses 24893 12893 93.1 65123 35730 82
Net Interest Income (NII) 19793 14376 37.7 55692 35858 55
Other Income 9394 6789 38.4 21759 17338 25
otal income 29186 21165 37.9 77451 53196 45
Operating expenses 14606 10501 39.1 41367 26429 56
Employee cost 5821 3528 65.0 17344 9558 81
Other operating expenses 8784 6973 26.0 24023 16871 42
Operating profit 14581 10664 36.7 36084 26767 34
Provision for contingencies 5318 4231 25.7 12223 10196 19
PBT 9263 6432 44.0 23862 16571 44Provision for taxes 3046 2139 42.4 7721 5380 43
Net profit 6217 4294 44.8 16141 11191 44
Equity 4251 3541 20.1 4251 3541 20
EPS 14.6 12.1 20.6 38.0 31.6 20
Ratios (%)
nt. exp/ Int. earned (%) 55.7 47.3 - 53.9 49.9
Cost/Income ratio (%) 50.0 49.6 - 53.4 49.7
Gross NPAs (Rs) 19114 8670 - 19114 8670
Net NPAs (Rs) 6143 2800 - 6143 2800
Gross NPAs (%) 1.9 1.2 - 1.9 1.2
Net NPAs (%) 0.6 0.4 - 0.6 0.4
ROA (%) 0.3 0.3 - 0.9 1.0 CAR (%) 13.7 13.8 - 13.7 13.8
ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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PROFIT&LOSSSTATEMENT
Year ending March, Rs in millions) FY07 FY08 FY09E FY10E FY1
nterest Income
Interest/Discount on advances and bills 43342 69667 122618 149338 1797
Income on Investments 20575 28720 41684 50661 606
Int. on bal. with RBI 2529 2724 1896 1642 18
Others 33 38 145 150 1
otal Interest Income 66479 101150 166344 201791 2423
nterest on deposits 26953 43827 81424 102150 1215
nterest on RBI / Inter-bank borrowings 2741 2424 6226 3977 44
Others 2101 2620 2799 2807 32
otal Interest expense 31795 48871 90449 108935 1293
Net Interest Income (NII) 34685 52279 75895 92857 1130
Other Income 15162 22832 29459 33828 393
otal Income 49847 75110 105354 126684 1523
Employees Cost 7769 13014 23143 26641 306
Other operating expenses 16439 24443 32777 37008 436otal operating expenses 24208 37456 55920 63649 743
Operating Profit (POPP) 25639 37654 49434 63035 780
Provisions and contingencies 9252 14848 16472 24069 302
Profit before tax (PBT) 16388 22806 32962 38966 477
ax provisions 4973 6905 10478 11807 144
Profit After Tax (PAT) 11415 15902 22484 27159 333
% change) 31.1 39.3 41.4 20.8 22
EPS 36.2 45.6 53.0 64.0 78
Share Capital 3194 3544 4246 4246 42ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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BALANCESHEET
Year ending March, Rs in millions) FY07 FY08 FY09E FY10E FY1
Sources of funds
Cash and Balances with RBI 50753 125532 81126 97026 1061
Bal. with banks 39714 22252 26070 28677 315
otal Advances / Credit 469448 634269 997840 1247840 15178
otal Investments 305648 493935 692140 843041 10232
ixed Assets 9667 11751 17283 19876 228
Other Assets 37127 44027 70368 84442 1013
Total assets 912356 1331767 1884828 2320902 28029
Application of funds
Share Capital 3194 3544 4250 4250 42
Reserves & Surplus 61138 111428 140565 163250 1920
otal Deposits 682979 1007686 1499620 1874620 22796
Borrowings 28154 44789 47350 52084 598
Other Liabilities and provisions 136891 164320 193044 226698 2670
Total liabilities 912356 1331767 1884828 2320902 28029ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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RATIOS
A) Efficiency Ratios (%) FY07 FY08 FY09E FY10E FY1
nt. exp/ Int. earned 47.8 48.3 54.4 54.0 5
NII / Total Income 69.6 69.6 72.0 73.3 74
Other income / Total Income 30.4 30.4 28.0 26.7 2
ee income / Other income 89.5 79.7 81.2 83.5 8
Fee income / Total Income 25.9 22.8 22.7 22.3 2
Cost / Income 48.6 49.9 53.1 50.2 4
C-D ratio 68.7 62.9 66.5 66.6 66
-D ratio 44.8 49.0 46.2 45.0 44
ncremental C-D ratio 95.1 50.8 75.8 66.7 66
ncremental I-D ratio 17.4 58.0 47.4 40.2 44
oan / Assets ratio 51.5 47.6 52.9 53.8 54
Deposits / Assets ratio 74.9 75.7 79.6 80.8 8
B) Spreads (%) FY07 FY08 FY09E FY10E FY1
Yield on Assets 8.5 9.4 10.8 10.1 9
Yield on Advances 10.6 12.6 15.0 13.3 13Yield on Investments 7.0 7.2 7.0 6.6 6
Cost of Funds 4.2 4.7 6.1 5.6 5
Cost of Deposits 4.3 5.2 6.5 6.1 5
Cost of Earning Assets 4.1 4.6 5.9 5.4 5
Net Interest Spread 4.3 4.7 4.7 4.5 4
Net Interest Margin (NIM) 4.4 4.9 4.9 4.6 4
Spreads on Advances 6.4 7.9 8.9 7.7
Spreads on Investments 2.8 2.5 0.9 1.0
C) Solvency FY07 FY08 FY09E FY10E FY1
Gross NPAs (Rs) 6578 9070 23249 40719 614
Net NPAs (Rs) 2029 2985 6968 16288 245
Gross NPAs / Gross Advances (%) 1.4 1.4 2.3 3.2 4
Net NPAs / Net Advances (%) 0.4 0.5 0.7 1.3
NPA provisioning / Net Advances (%) 1.0 1.0 1.6 2.0 2
Delinquency rate (%) 2.22 2.56 3.0 3.0 3
Provision coverage ratio (%) 69.2 67.1 70.0 60.0 60ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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RATIOS
D) Measures of Investment FY07 FY08 FY09E FY10E FY1
EPS (Rs) 36.2 45.6 53.0 64.0 7
BV (Rs) 203.8 329.6 341.1 394.5 46
Adjusted BV (Rs) 197.4 321.1 324.7 356.1 404
DPS (Rs) 7.0 8.5 9.0 9.0 9
Avg. ROE (%) 19.5 17.7 17.3 17.4 18
Avg. ROA (%) 1.4 1.4 1.4 1.3
Pre-tax ROA (%) 2.0 2.0 2.0 1.9
Pre-provisioning operating ROA (%) 3.1 3.4 3.1 3.0 3
Pre-provisioning operating ROE (%) 43.7 42.0 38.1 40.4 4
P/E (x) 26.2 29.0 16.8 13.9 1
P/BV (x) 4.7 4.0 2.6 2.3
P/ABV (x) 4.8 4.1 2.7 2.5
P/PPOP (x) 41.8 41.7 20.4 15.8 12
Dividend yield (%) 0.7 0.6 1.0 1.0
Dividend Payout ratio (%) 19.4 18.6 17.0 14.1 1Effective tax rate (%) 30.3 30.3 31.8 30.3 30
E) Breakdown of ROA (%) FY07 FY08 FY09E FY10E FY1
nterest Income 8.1 9.0 10.3 9.6 9
nterest expenses 3.9 4.4 5.6 5.2 5
NII/avg assets 4.2 4.7 4.7 4.4 4
Non-NII/avg. assets 1.8 2.0 1.8 1.6
otal Income 6.1 6.7 6.6 6.0 5
ee income/avg. assets 1.6 1.5 1.5 1.3
Operating exp/avg. assets 2.9 3.3 3.5 3.0 2
Operating profit/avg assets 3.1 3.4 3.1 3.0 3
Provisions/avg. assets 1.1 1.3 1.0 1.1
PBT/avg. assets 2.0 2.0 2.0 1.9 ax/avg. assets 0.6 0.6 0.7 0.6 0
PAT/avg. assets 1.4 1.4 1.4 1.3
) Growth Rates (%) FY07 FY08 FY09E FY10E FY1
nterest Income 48.5 52.2 64.5 21.3 2
nterest Expenses 64.8 53.7 85.1 20.4 1
NII 36.2 50.7 45.2 22.3 2
Other Income 34.9 50.6 29.0 14.8 1
otal Income 35.8 50.7 40.3 20.2 20
Operating Income 29.6 46.9 31.3 27.5 23
Net Profit 31.1 39.3 41.4 20.8 22
Deposits 22.4 47.5 48.8 25.0 2Advances 33.9 35.1 57.3 25.1 2
H) Other performance parameters FY07 FY08 FY09E FY10E FY1
No. of branches (No.) 684 761 1412 1542 17
No. of employees (No.) 21477 37836 52244 60138 684
Business per branch (Rs) 1685 2158 1769 2025 22
Profit per branch (Rs) 17 21 16 18
Business per employee (Rs) 54 43 48 52
Profit per employee (Rs) 0.5 0.4 0.4 0.5 ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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PROFIT&LOSSSTATEMENT(NOTE:FY08FIGURESAREMERGERED)
Year ending March, Rs in millions) FY07 FY08 FY09E FY10E FY1
nterest Income
Interest/Discount on advances and bills 43342 86875 122618 149338 1797
Income on Investments 20575 32465 41684 50661 606
Int. on bal. with RBI 2529 3156 1896 1642 18
Others 33 112 145 150 1
otal Interest Income 66479 122608 166344 201791 2423
otal Interest expense 31795 63360 90449 108935 1293
Net Interest Income 34685 59248 75895 92857 1130
Other Income 15162 28770 29459 33828 393
otal Income 49847 88018 105354 126684 1523
Employees Cost 7769 15856 23143 26641 306
Other operating expenses 16439 30223 32777 37008 436
otal operating expenses 24208 46079 55920 63649 743
Operating Profit 25639 41939 49434 63035 780
Provisions and contingencies 9252 16682 16472 24069 302Profit before tax (PBT) 16388 25257 32962 38966 477
ax provisions 4973 7775 10478 11807 144
Profit After Tax (PAT) 11415 17482 22484 27159 333
% change) 31.1 53.2 28.6 20.8 22
EPS 36.2 41.2 53.0 64.0 78
Share Capital 3194 4246 4246 4246 42ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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BALANCESHEET(NOTE:FY08FIGURESAREMERGERED)
Year ending March, Rs in millions) FY07 FY08 FY09E FY10E FY1
Sources of funds
Cash and Balances with RBI 50753 133598 81126 97026 1061
Bal. with banks 39714 24632 26070 28677 315
otal Advances / Credit 469448 785104 997840 1247840 15178
otal Investments 305648 558945 692140 843041 10232
ixed Assets 9667 15751 17283 19876 228
Other Assets 37127 62138 70368 84442 1013
Total assets 912356 1580169 1884828 2320902 28029
Application of funds
Share Capital 3194 4246 4250 4250 42
Reserves & Surplus 61138 122557 140565 163250 1920
otal Deposits 682979 1218786 1499620 1874620 22796
Borrowings 28154 52069 47350 52084 598
Other Liabilities and provisions 136891 182512 193044 226698 2670
Total liabilities 912356 1580169 1884828 2320902 28029ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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RATIOS(NOTE:FY08FIGURESAREMERGERED)
Ratios (%) FY07 FY08 FY09E FY10E FY1
nt. exp/Int. earned (%) 47.8 51.7 54.4 54.0 5
NII / Total Income (%) 69.6 67.3 72.0 73.3 74
Other income / Total Income (%) 30.4 32.7 28.0 26.7 2Cost / Income (%) 48.6 52.4 53.1 50.2 4
C-D ratio (%) 68.7 64.4 66.5 66.6 66
-D ratio (%) 44.8 45.9 46.2 45.0 44
ncremental CD ratio (%) 95.1 71.5 75.8 66.7 66
ncremental ID ratio (%) 17.4 30.8 47.4 40.2 44
oan / Assets ratio (%) 51.5 49.7 52.9 53.8 54
Deposits / Assets ratio (%) 74.9 77.1 79.6 80.8 8
Yield on Assets (%) 8.5 10.4 10.1 10.1 9
Yield on Advances (%) 10.6 13.8 13.8 13.3 1
Yield on Investments (%) 7.0 7.5 6.7 6.6 6
Cost of Funds (%) 4.2 5.5 5.7 5.6
Cost of Deposits (%) 4.3 0.0 6.0 6.1 5Cost of Earning Assets (%) 4.1 5.4 5.5 5.4 5
Net Interest Spread (%) 4.3 4.8 4.4 4.5 4
Net Interest Margin (%) 4.4 5.0 4.6 4.6 4
Spreads on Advances (%) 6.4 8.3 8.1 7.7
Spreads on Investments (%) 2.8 2.0 1.0 1.0
EPS (Rs) 36.2 41.2 53.0 64.0 7
BV (Rs) 203.8 298.6 341.1 394.5 46
Avg. ROE (%) 19.5 18.3 16.6 17.4 18
Avg. ROA (%) 1.4 1.4 1.3 1.3
Pre-tax ROA (%) 2.0 2.0 1.9 1.9
Pre-provisioning operating ROA (%) 3.1 3.4 2.9 3.0 3
Pre-provisioning operating ROE (%) 43.7 43.9 36.4 40.4 4
P/E (x) 26.2 32.1 16.8 13.9 1
P/BV (x) 4.7 4.4 2.6 2.3 ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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RATIOS(NOTE:FY08FIGURESAREMERGERED)
Breakdown of ROA (%) FY07 FY08 FY09E FY10E FY1
nterest Income 8.1 9.8 9.6 9.6 9
nterest expenses 3.9 5.1 5.2 5.2
NII/ avg assets 4.2 4.8 4.4 4.4 4Non-NII/avg. assets 1.8 2.3 1.7 1.6
otal Income 6.1 7.1 6.1 6.0 5
Operating exp/avg. assets 2.9 3.7 3.2 3.0 2
Operating profit/ avg assets 3.1 3.4 2.9 3.0 3
Provisions/avg. assets 1.1 1.3 1.0 1.1
PBT/avg. assets 2.0 2.0 1.9 1.9
ax/avg. assets 0.6 0.6 0.6 0.6 0
PAT/avg. assets 1.4 1.4 1.3 1.3
Growth Rates (%)
nterest Income 48.5 84.4 35.7 21.3 2
nterest Expenses 64.8 99.3 42.8 20.4 1
NII 36.2 70.8 28.1 22.3 2Other Income 34.9 89.7 2.4 14.8 1
otal Income 35.8 76.6 19.7 20.2 20
Operating Income 29.6 63.6 17.9 27.5 23
Net Profit 31.1 53.2 28.6 20.8 22
Deposits 22.4 78.5 23.0 25.0 2
Advances 33.9 67.2 27.1 25.1 2ource: Company, Systematix Institutional Researchote: Figures rounded off to nearest rupee
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R. Ganesh Director & CEO +91-22-3029 8250 [email protected]
quity Sales
harmila Joshi VP Sales +91-22-3029 8254 [email protected]
ikhil Khandelwal VP Sales +91-22-3029 8263 [email protected]
ankaj Karde AVP Sales +91-22-3029 8265 [email protected] Maniar Senior Manager +91-22-3029 8251 [email protected]
quity Research Telephone: + 91-22- 3029 8000
ANALYST SECTOR ALLOCATION DIRECT NOS. E-MAIL
ric Martins Sr. Research Analyst - Metals, Shipping & Logistics, Pipes + 91-22- 3029 8253 [email protected]
bhinav Khandelwal Sr. Research Analyst - Engineering, Offshore Services + 91-22- 3029 8261 [email protected]
yoti Khatri Sr. Research Analyst - Banking + 91-22- 3029 8187 [email protected]
Rabindra Nath Nayak Sr. Research Analyst - Power, Gas Utilities + 91-22- 3029 8260 [email protected]
Madhu Babu Sr.Research Analyst - IT, Telecom + 91-22- 3029 8258 [email protected]
inod Modi Research Analyst - Cement, Construction & Real Estate + 91-22- 3029 8264 [email protected]
avita Rawat Research Analyst - Hotels, Retail, FMCG + 91-22- 3029 8259 [email protected]
arrichay Goel Research Analyst - Auto & Auto Ancillaries + 91-22- 3029 8292 [email protected]
Rohit Jain Research Analyst - Metals, Pipes + 91-22- 3029 8269 [email protected]
inod Birla Research Associate - Capital Goods, Agri + 91-22- 3029 8275 [email protected]
tul Pandit Research Associate - Large Caps + 91-22- 3029 8256 [email protected]
asanth Patil Research Associate - Cement, Real Estate, Infrastructure + 91-22- 3029 8183 [email protected]
Derivatives
Raghvendra Kedia VP Sales (Derivatives) +91-22-3029 8091 [email protected]
haurya Chandra Sr. Derivatives Analyst + 91-22- 3029 8186 shauryac @systematixshares.com
Manoj Murlidharan Derivatives Analyst + 91-22- 3029 8272 [email protected]
Dealing
inod Bhuwad Asst. Manager + 91-22- 3029 8267 [email protected]
neha Kamat Dealer + 91-22- 3029 8268 [email protected]
ilesh Thakkar Derivatives Dealer + 91-22- 3029 8184 [email protected]
ayan Narnoli Derivatives Dealer + 91-22- 3029 8180 [email protected]
Stock RatingsBUY (B) The stock's total return is expected to exceed 20% over the next 12 months.ACCUMULATE (A) The stock's total return is expected to be within 10-20% over the next 12 months.REDUCE (R) The stock's total return is expected to be within0-10% over the next 12 months.SELL (S) The stock's is expected to give negative returns over the next 12 months.NOT RATED (NR) The analyst has no recommendation on the stock under review.
Industry ViewsATTRACTIVE (AT) Fundamentals /Valuations of the sector is expected to be attractive over the next 12-18 months.NEUTRAL (NL) Fundamentals /Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months.CAUTIOUS CS Fundamentals /Valuations of the sector is ex ected to deteriorate over the next 12-18 months.
For any queries please feel free to contact us
Institutional Team
ANALYST DISCLAIMER
This document has been prepared by Systematix Shares & Stocks (I) Ltd. This report is the personal information of the authorized recipient and does not construe to be any investment, legataxation advice to you. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
We, at Systematix Shares & Stocks (I) Ltd., have prepared this report based on the data we consider reliable, but we do not vouch it to be accurate or complete, and it may not be relied upon such. Systematix Shares & Stocks (I) Ltd does not in any way be responsible for any loss or damage that may arise to any person due to the content in the report. Each recipient of this documeshould make an independent valuation of their own in the securities referred to in this report.
Besides, the data in this document is subject to change without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privilegmaterial and is not for any type of circulation. Any review, retransmission, or any other use of the report and the content within, is prohibited.
Disclosure of Interest1. The analysts who have prepared the report have in no way received or are expected to receive any compensation from the subject company.2. The analysts do not hold any position in the subject companys stock, as on the date of release.3. Neither the company nor an affiliate company of Systematix Shares & Stocks (I) Ltd. has received a mandate from the subject company.4. Systematix Shares & Stocks (I) Ltd., or its affiliates do not hold any paid up capital in the company