BUY SUHANI ADILABADKAR RESEARCH REPORT Q1 FY17

HDFC BANK LTD QUARTERLY OUTLOOK & RECOMMENDATION Banking Industry bell-weather, HDFC Bank reported strong first quarter results with Net Profit, Net Interest Income, deposits and advances rising in double digits. Net Interest Income, difference between interest earned and expended was at Rs. 77814 mn up by 22% YOY. Net Profit too zoomed 20% YOY at Rs. 32389 mn in the current June quarter. Net Interest Margin indicating core profitability of bank’s operations stood at 4.40%, rising 10 basis points both YOY and QOQ. Gross NPAs as a percentage of Gross Advances edged 9 basis points YOY, Net NPAs as a percentage of net advances also rose 5 basis points at 0.32% in the current June quarter. Provisions & contingencies multiplied 1.3 times QOQ, and on yearly basis rise was 19% at Rs. 8667 mn in Q1 FY17. Double digit growth is visible in all business segments, the highest in other banking business (24%), followed by treasury (19%) and wholesale (16%). Retail segment contributes 52% of total revenue and reported 13% growth at Rs. 158526 mn in the current quarter. CASA stood at 39.90% improving 30 basis points yearly. One basis point is 0.01%. Other income accounting 15% of the total income of the bank rose 14% YOY and stood at Rs. 28066 mn in current Q1 FY17. Loan book moved at a higher rate of 23% than deposits growing at 19%. But quarterly growth was better for deposits in the current June quarter at 5% whereas advances rose sequentially at a dismal 1.3%. With uncertainty and volatility hallmark of financial markets, Indian financial sector with HDFC bank as one of its strong pillars of early reforms is still one of the best long term bets. The second largest private sector bank with CAR of 15.50% (Tier I-13.30%) commands credibility due to growing profitability and stable asset quality in today’s volatile scenario. The bank is poised for higher growth as one of the major players in Indian banking industry. Thus we recommend BUY for the stock for medium and long term investment.

CMP

Rs. 1249.60

TARGET

Rs. 1350.00

SECTOR

BANKING

SCRIP CODE

500180

FACE VALUE

Rs. 2.00

MARKET Rs. 3167798.48 Mn CAP 52 WEEK Rs.1259.00/Rs.928.80 HIGH/LOW SHAREHOLDING PATTERN (%) PROMOTER 26.34 PUBLIC 73.66 OTHERS TOTAL 100 Q1 FY17 Q1 FY16 CHN% Rs. In Mn NII 77814 63888 22% NIM

4.40%

4.30%

10 BP

PAT

32389.10

26957.20

20%

EPS

12.78

10.73

19%

Rs. In Mn

FY16A

FY17E

FY18E

NII

275915

328190

378232

PAT

122962

148627

175215

EPS

48.64

58.63

69.12

PE

25.69

21.31

18.08

HDFC BANK V/S S&P BSE 30

PERFORMANCE METRICS (June Quarter FY17) Profitability Analysis PROFIT AFTER TAX (Rs.In Mn)

NET INTEREST MARGIN 4.45%

33568

35000 30000

26957

33742

32389 4.40%

4.40%

28695 4.35%

25000 4.30%

4.30%

4.30%

4.30%

20000 4.25%

15000 10000

4.20%

5000

4.15%

0 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

HDFC Bank witnessed strong first quarter FY17 with PAT and NII both rising by 20% and 22% respectively. Net Profit stood at Rs. 32389 mn compared to Rs. 26957 mn in corresponding period previous year. Net Interest Income grew sequentially at 4% at Rs. 77814 mn in the current June quarter. Net Interest Margin improved 10 basis points both yearly and quarterly at 4.40% in Q1 FY17. De-growth of 2% was reported with respect to Other Income but yearly rise was 14% in the current June quarter. Other income constitutes 15% of the total income of Rs 193226 mn. Fees & commission, major component of other income rose 15% contributing 71% of the total Other Income. Revaluation on sale of investments grew by 120% in current June quarter whereas negative growth was witnessed in Forex Derivatives (9.63%) and Misc Income (14%) in first June quarter FY17.

4.20%

4.10% Q1 FY16

Q2 FY16

Q3 FY16

Q4 FY16

Q1 FY17

NET INTEREST INCOME (Rs In Mn)

80000

74533

77814

70685 70000

63888

66809

60000 50000 40000 30000 20000 10000 0 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

OTHER INCOME (Rs In Mn) Q1 FY17

OTHER INCOME COMPOSITION

Q4 FY16

28659

Q3 FY16

28722

Fees & Commision

8%

28066

10%

Foreign ex & Derivatives

11% 71% Q2 FY16

25518

Q1 FY16

20000

Revaluation & sale on Investments Misc Income

24619

22000

24000

26000

28000

30000

Segment Revenue Analysis Segment Revenue (Rs. In Mn)

Q1 Y17

Q1 FY16

YOY CHNG%

Treasury

50232.40

42060.90

19.43%

SEGMENT REVENUE COMPOSITION

Treasury 6%

Retail

158526.40

139606.90

13.55%

Wholesale Banking

76152.70

65816.20

15.71%

Other Banking Business

19496.70

15764.80

23.67%

17%

25%

Retail Wholesale Banking

52%

Other Banking Business

All revenue segments rose in double digits YOY with Other banking business clocking 24% YOY. Retail segment representing more than half of revenue rose 13.55% YOY and 3% growth over the previous March quarter. Wholesale segment increased 16% yearly and 8% QOQ which is the highest sequential growth among all the revenue segments. Treasury contributing 17% of the total revenues rose 19% YOY at Rs. 50232.40 mn against Rs. 42060.90 mn in the corresponding quarter previous year. Major revenue driver for the bank remains retail segment and is expected to pick up strongly with the implementation of GST and seventh pay commission. Corporate or Wholesale segment is already exhibiting signs of expansion as evident from our economy’s steady recovery.

Asset Quality Analysis PROVISIONS & CONTENGENCIES ASSET QUALITY

Q1 FY17

CHANGE Q1 FY16 YOY

(Rs. In Mn) 10000 8667

9000 8000

Gross NPAs

1.04%

0.95%

7280

7000

9 BP

6813

6539

6625

6000 5000 4000

Net NPAs 0.32%

0.27%

5 BP

3000

2000

Provisions & Contingencies

1000

8667.30

7279.90

19.06%

0 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

With respect to scale of operations and being the second largest private sector bank in asset base, HDFC Bank has stable asset quality. NPA ratios are the lowest compared to other two industry leaders, ICICI and Axis Bank. Gross NPAs as a percentage of gross advances edged up 9 basis points YOY whereas the quarterly rise was an additional basis point taking the ratio to 1.04% in Q1 FY17. Net NPAs at 0.32% of net advances deteriorated by 5 basis points compared to the same period previous year. One basis point is 100th of percentage. Provisions jumped 19% YOY at 8667 mn and quarterly growth was even higher at 30% in the current Q1 FY17. Provisions and contingencies for the quarter ended 30 th June 2016 consisted of Specific loan loss provisions at Rs. 8323 mn and General, floating and other provisions stood at Rs. 344 mn. Total restructured loans were constant at 0.1% of gross advances as on 30th June, 2016. NON PERFORMING ASSETS 1.20% 1.00%

0.95%

0.97%

0.91%

1.04% 0.94%

0.80%

GNPAS

0.60% 0.40%

NNPAS 0.27%

0.25%

0.29%

0.28%

0.32%

0.20% 0.00% Q1 FY16

Q2 FY16

Q3 FY16

Q4 FY16

Q1 FY17

Business Growth Analysis Though CASA has declined by almost 310 basis points (BP) quarterly, it still constitutes a healthy 40% of the total deposits and there has been 30 BP rise yearly. Advances rose at a higher average of 5.40% over the previous four quarters whereas deposits moved at 4% over the same period. Savings account constitutes 27% of the total deposits and rose 22% YOY at Rs. 1527010 mn as of June 2016. Current accounts are 13% of the total deposits and increased by 14% YOY to reach Rs. 760820 mn. Time deposits stood at Rs. 3449720 mn reporting rise of 18 % over the same period previous year. The bank has 54% of its 4541 branches in rural and semi urban areas leading to stable CASA ratio. CAR and Tier I as per Basel III guideline is 15.50% and 13.30% respectively as on 30th June 2016.

CASA RATIO

44.00% 43.00%

43%

42.00% 41.00% 40%

40%

39.90%

40.00% 39.60%

39.00% 38.00% 37.00%

Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

ADVANCES &DEPOSITS (Rs In mn) 6000000

4841740

5000000 3820100

5069090

4185410

5239970 4363640

5464240 4645940

5737550 4706220

4000000

Advances

3000000

Deposits

2000000 1000000 0 30/06/15

30/09/15

31/12/15

31/03/16

30/06/16

Though average growth rate for Advances over the previous four quarters is around 5.4%, QOQ growth was just 1.3% in Q1 FY17. Advances rose 23% on yearly basis and stood at Rs.470620 mn as of June 2016. The loan growth was contributed by both segments domestic retail loans and wholesale loans, as per Bank’s internal business classification both grew by 24.50% (as per regulatory Basel 2 segment classification grew by 24.90% and 23.70% respectively). The domestic loan mix as per Basel 2 classification between retail: wholesale was 53:47. Deposits grew YOY by 19% and stood at Rs. 5737550 mn compared to Rs. 4841740 mn in the same quarter previous year. Average growth rate of deposits over the previous four quarter is around 4%.

Corporate Profile The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of RBI's liberalization of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC Bank caters to a wide range of banking services covering commercial and investment banking on the wholesale side and transactional / branch banking on the retail side. HDFC Bank is headquartered in Mumbai. As of June 30, 2016, the Bank’s distribution network was at 4541 branches and 12013 ATMs. 54% of the branches are in semi urban and rural areas. All branches are linked on an online real-time basis. Customers across India are also serviced through multiple delivery channels such as Phone Banking, Net Banking, Mobile Banking and SMS based banking. The Bank’s expansion plans take into account the need to have a presence in all major industrial and commercial centres, where its corporate customers are located, as well as the need to build a strong retail customer base for both deposits and loan products. Being a clearing / settlement bank to various leading stock exchanges, the Bank has branches in centres where the NSE / BSE have a strong and active member base.

Financial Analysis QUARTERLY PROFIT & LOSS STATEMENT OF HDFC BANK FROM 31ST December 2015 TO 30th September 2016E

VALUE

31- Dec-15

31-March-16

30-June-16

30-Sep-16E

RS. IN MILLION

3 months

3 months

3 months

3 months

INTEREST EARNED

154111.20

159967.50

165160.20

173418.21

OTHER INCOME

28721.90

28658.60

28066.10

29469.41

TOTAL INCOME

182833.10

188626.10

193226.30

202887.62

INTEREST EXPENDED

-83426.10

-85434.10

-87345.80

-90839.63

PROFIT BEFORE OP EXP & PROVISIONS

99407.00

103192.00

105880.50

112047.98

OPERATING EXPENSES

-42048.40

-45842.90

-47688.60

-50073.03

OPERATING PROFIT

57358.60

57349.10

58191.90

61974.95

PROVISIONS

-6538.80

-6624.50

-8667.30

-9100.67

PROFIT BEFORE TAX

50819.80

50724.60

49524.60

52874.29

TAX

-17251.40

-16982.40

-17135.50

-18334.99

PROFIT AFTER TAX

33568.40

33742.20

32389.10

34539.30

EQUITY CAPITAL

5050.20

5056.40

5070.10

5070.10

FACE VALUE

2.00

2.00

2.00

2.00

EPS

13.29

13.35

12.78

13.62

ANNUAL PROFIT & LOSS STATEMENT FROM 2015 TO 2018E VALUE

31- Mar-15 31- Mar-16 31- Mar-17E 31-Mar-18E

RS. In Million

12 months

12 months

12 months

12 months

INTEREST EARNED

484699.10

602214.50

710613.11

806545.88

OTHER INCOME

89963.40

107517.20

122569.61

137277.96

TOTAL INCOME

574662.50

709731.70

833182.72

943823.84

INTEREST EXPENDED

-260742.30

-326299.30

-382422.78

-428313.51

OPERATING PROFIT BEFORE OP EXP & PROVISIONS

313920.20

383432.40

450759.94

515510.33

OPERATING EXPENSES

-139875.50

-169796.90

-195266.44

-216745.74

OPERATING PROFIT

174044.70

213635.50

255493.50

298764.58

PROVISIONS

-20757.50

-27256.10

-34887.81

-42214.25

PROFIT BEFORE TAX

153287.20

186379.40

220605.70

256550.34

TAX

-51128.00

-63417.10

-71978.41

-81335.60

PROFIT AFTER TAX

102159.20

122962.30

148627.29

175214.74

5013.00

5056.40

5070.10

5070.10

615081.30

721721.30

870348.59

1045563.32

FACE VALUE

2.00

2.00

2.00

2.00

EPS

40.76

48.64

58.63

69.12

EQUITY CAPITAL RESERVES

BALANCE SHEET FROM 2015 TO 2018E CAPITAL & LIABILITIES (RS. In Mn) CAPITAL RESERVES & SURPLUS DEPOSITS BORROWINGS OTHER LIABILITIES & PROVISIONS TOTAL LIABILITIES ASSETS (Rs. In Mn) CASH & BALANCES WITH RBI BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE INVESTMENTS ADVANCES

2015

2016

2017E

2018E

5070.10

5070.10

5013.00

5056.40

615081.30 4507956.50

721721.30 5464241.90

452135.60 324844.40

530184.80 367251.30

5905030.80

7088455.70

275104.50

300583.10

336653.07

363585.32

88210.00

88605.30

89491.35

89938.81

1516417.70 3654950.40

1638857.80 4645939.60

870348.59 1045563.32 6447805.44 7472764.64 625618.06 403976.43

713204.59 436294.54

8352818.62 9672897.20

1688023.53 1730224.12 5782733.77 6992935.03

FIXED ASSETS OTHER ASSETS TOTAL ASSETS

31217.20 339131.00

33431.50 381038.40

5905030.80

7088455.70

36774.65 419142.24

39348.88 456865.04

8352818.62 9672897.20

Ratio Analysis Year

FY 15A

FY 16A

FY 17E

FY18E

EPS

40.76

48.64

58.63

69.12

NPM

21%

20%

21%

22%

BOOK VALUE

247.39

287.47

345.33

414.44

ROE

16%

17%

17%

17%

P/BV

5.05

4.35

3.62

3.02

PE

30.66

25.69

21.31

18.08

Comparative Analysis

Q1 FY17

EPS

CAR

PAT (Rs. In Mn)

GNPA RATIO

MKT CAP (Rs. In Mn)

NIM

CASA RATIO

INDUSIND BANK

11.10 15.42%

Rs. 6614

0.91%

Rs. 707675.20

3.97%

34.40%

HDFC BANK

12.78 15.50%

Rs. 32389

1.04%

Rs. 2694758.15

4.40%

39.90%

YES BANK

17.39 15.10%

Rs. 7318

0.79%

Rs. 563271.80

3.40%

29.60%

4.04

Rs. 7419

2.50%

Rs. 1428406.30

4.37%

37.40%

KOTAK MAHINDRA BANK

16.34%

OTHER IMPORTANT INFORMATION 

CURRENT & SAVINGS DEPOSITS

SAVINGS & CURRENT ACCOUNTS (Rs. In Mn) 669170 Q1 FY16

1249470 698110

Q2 FY16

1315220

SA

740440 Q3 FY16 884250 Q4 FY16

CA

1354320 1478860

760820 Q1 FY17

1527010 0



500000

1000000

1500000

2000000

OTHER INCOME COMPONENTS

Industry- Current Scenario Indian Banking Sector has been the bedrock of resilience against global volatility. With fiscal deficit & CAD in control, stable exchange rate and moderate inflation, India is poised for high sustainable growth. Indian banking system on its part has gone though various highs and lows over the last 10-12 years. Third & fourth quarters of FY16 for Indian banks especially PSU were marred by high provisions and losses due to cleaning up process directed by Reserve Bank Of India. PSU banks might be under stress for the next 2 -3 quarters whereas Private sector banks with low exposure to power & infrastructure sectors have fared well during financial crises since 2008. Though they have performed well during tough times buttressing banking services in urban and semi urban India, they have not remained unscathed by slowing Indian economy as witnessed by rising non performing assets. Over the last one and a half years, domestic scenario has changed with more autonomy given to banks through Indradanush initiative undertaken by the government. In addition to that proactive policies have been undertaken by the central bank such as introduction of MCLR, addressing liquidity needs of the banking sector, tighter norms for willful defaulters and licenses given to small & payment banks. New MCLR base rate

methodology adopted since 1st April 2016 is expected to lower lending rates buttressing the loan book of the banks leading to improved bottom-line and lower provisions. With the economy gaining momentum as exhibited by the latest IIP numbers, banking system needs to become agile to fulfill the requirements of both corporate and households. On the global front, US Fed tantrums, European sluggish economy, China’s decelerating growth have given enough challenges for our banking industry. But even in this uncertain volatile world economy, both public and private sector banks have worked together to strengthen our financial system and made India the only Brick left in the famed BRICS ellipsis.

OUTLOOK FOR THE BANK  HDFC Bank, rightly Indian banking sector bell-weather has the best Net Interest Margin in the industry. In the current June quarter, NIM stands at 4.40%, improving 10 basis points YOY and quarterly. Net Interest Margin indicating operational efficiency has been above 4% over the previous 4 quarters.  Net Interest Income (NII), another profitability indicator has been above 20% over the previous four quarters on yearly basis which is phenomenal in the present volatile scenario. High and stable NII growth exhibits higher operational efficiency and profitability.  Though advances reported dismal growth in the current June quarter, yearly growth has been strong at 23%. Deposits climbed 18.5% YOY and quarterly growth was 5% in Q1 FY17.  Cost to income for the quarter ended 30th June 2016 was 45% as against 45.20% for the corresponding quarter previous year. HDFC bank has increased its distribution network to 4541 branches as on 30th June 2016, adding 440 branches YOY.  Capital Adequacy Ratio of the bank stood at 15.50% way above regulatory requirement of 9% and Tier I has improved from 12.80% to 13.30% as on 30th June 2016.  The bank has stable asset quality as its GNPA & NNPA ratios are low with respect to its size of operations and market capitalization. Total balance sheet size of the bank as on 30th June 2016 was Rs. 7551000 mn.

 Key drivers for the bank, stable NIM at 4.40%, high Net Interest Income and low non performing assets makes it one of the desirable banking stocks for long term investors. HDFC bank is an epitome of stability & profitability in the present volatile scenario. Thus our recommendation remains positive for medium and long term with a target price of Rs. 1350. SUHANI ADILABADKAR [email protected] 9701063320

Disclaimer The information and opinions contained in the research reports have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. The research report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including but not limited to tax advice. The reports do not take into account the particular investment objectives, financial situations, risk profile or needs of individual clients. The user assumes the entire risk of any use made of this information. This report is not to be relied upon in substitution for the exercise of independent judgment. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Research data and reports published/ emailed/ text messaged via Short Messaging Services, Online Messengers, WhatsApp etc/transmitted through mobile application/s, including but not limited to FLIP™, Video Widget, telephony networks, print or electronic media and or those made available/uploaded on social networking sites (e.g. Facebook, Twitter, LinkedIn etc) is for informational purposes only. The reports are provided for assistance and are not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Though disseminated to clients simultaneously, not all clients may receive the reports at the same time. We will not treat recipients as clients by virtue of their receiving this report.

The reports include projections, forecasts and other predictive statements which represent our assumptions and expectations in the light of currently available information. These projections and forecasts are based on industry trends, circumstances and factors which involve risks, variables and uncertainties. The actual performance of the companies represented in the report may vary from those projected. The opinions expressed in the reports are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. The reports are non-inclusive and do not consider all the information that the recipients may consider material to investments. We shall not be in any way responsible for any indirect, special or consequential damages that may arise to any person from any inadvertent error in the information contained in the reports nor do they take guarantee or assume liability for any omissions of the information contained therein. Information contained therein cannot be the basis for any claim, demand or cause of action. These data, reports and information do not constitute scientific publication and do not carry any evidentiary value whatsoever. The user should consult their own advisors to determine the merits and risks of investment and also read the Risk Disclosure Documents for Capital Markets and Derivative Segments as prescribed by Securities and Exchange Board of India before investing in the Indian Markets. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Prospective investors and others are cautioned that any forward-looking statements, if any, are not predictions and may be subject to change without notice. This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to material we take no responsibility whatsoever for the contents therein. Such addresses or hyperlinks are provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report shall be at your own risk. The author of this Research Report accepts no liability and will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behavior of investors or recipients or provide any investment/tax advice. 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.