2QFY16 HDFC Bank -...

21 October 2015

2QFY16 Result Update | Sector: Financials

HDFC Bank

Alpesh Mehta ([email protected]); +91 22 3982 5415 Dhaval Gada ([email protected]); +91 22 3982 5505

BSE SENSEX S&P CNX CMP: INR1,095 TP: INR1,350 (+23%) Buy 27,288 8,252 Bloomberg HDFCB IN

Equity Shares (m) 2,506.5 M.Cap (INR b)/(USD b) 2744/42.2 52-Week Range (INR) 1,128/888 1, 6, 12 Rel. Per (%) 0/10/20 Avg Val (INRm) 1,876 Free float (%) 78.4

Financials & Valuation (INR Billion) Y/E Mar 2016E 2017E 2018E

NII 271.6 328.8 400.1 OP 211.7 255.4 310.3 NP 123.1 148.6 178.5 NIM (%) 4.6 4.5 4.4 EPS (INR) 49.1 59.3 71.2 EPS Gr. (%) 20.5 20.7 20.1 BV/Sh. (INR) 285 331 385 ABV/Sh. (INR) 282 327 380 RoE (%) 18.4 19.3 19.9 RoA (%) 1.9 1.9 1.8 Payout (%) 23.4 23.4 23.4 Valuations P/E(X) 22.3 18.5 15.4 P/BV (X) 3.8 3.3 2.8 P/ABV (X) 3.9 3.4 2.9 Div. Yield (%) 0.9 1.1 1.3

In line; strong retail loan growth and branch expansion continue HDFC Bank's (HDFCB) 2QFY16 PAT grew 20% YoY (in line) to INR28.7b. Strong

retail loan growth (10% QoQ, 29% YoY), healthy fee income growth of 22% YoY, robust SA growth of 19% YoY and continued branch expansion (+125 QoQ, +625 YoY to 4,227) were the key highlights of the quarter.

Loan growth (+10% QoQ and 28% YoY) was driven by a) business banking (+13% QoQ and +24% YoY), b) personal loan (+12% QoQ, +39% YoY), c) Kissan Gold Card (+16% QoQ, +51% YoY) and d) CV/CE (+9% QoQ, +18% YoY). Further, cut in base rate (35bp) during the quarter (earlier than competitors) helped the bank gain market share in corporate loans (+9% QoQ, +26% YoY). Share of retail loans (based on HDFCB classification) increased to 63% from 62% in 2QFY15.

Led by strong loan growth, core revenue (NII+Fees) growth remains healthy (20%+ YoY over the last five quarters)—giving HDFCB avenues to expand aggressively (branches +17% YoY, headcount +11% YoY) and invest in the digitalization initiatives without impact on cost ratios (C/I ratio in the 45-47% range).

Other highlights: a) CASA ratio remained stable QoQ at 40%; b) HDFCB made INR500m of floating provisions; c) NSL remains the lowest among peers at 35bp; d) CET1 ratio remained stable QoQ at 12.8%.

Valuation and view: HDFCB is best placed in the current environment, with ~40% CASA ratio, growth outlook of at least 1.3x industry and lowest asset quality risk. With CET1 of ~12.8%, strong capacity building in the moderate growth cycle (branches at 4,227 v/s 1,412 in FY09) and significant digitalization initiatives, the bank is well placed to benefit from the expected pick-up in the economic growth cycle. Despite the recent capital raising, RoE is expected to be ~19-20% in FY17/18. Comfort on earnings remains high. Maintain Buy with a target price of INR1,350 (4x FY17E BV).

Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

21 October 2015 2

HDFC Bank

Exhibit 1: Quarterly Performance: In-line with estimate Y/E March 2QFY16A 2QFY16E V/S our Est Comments Net Interest Income 66,809 66,203 1 Inline performance; Reported NIMs decline 10bp QoQ % Change (Y-o-Y) 21 20 Other Income 25,518 25,296 1 Inline; core fee income growth remains healthy at 22% YoY Net Income 92,327 91,500 1 Operating Expenses 41,898 44,272 -5 Beat driven by strong control in non-staff expenses (19% YoY

v/s 29% YoY in 1Q) Operating Profit 50,429 47,228 7 Operating leverage help boost profitability % Change (Y-o-Y) 24 16 Other Provisions 6,813 3,750 82 Higher than expected led by higher standard asset provisioning

and INR500m floating provisions Profit before Tax 43,616 43,478 0 Tax Provisions 14,922 14,783 1 Net Profit 28,695 28,695 0 Higher provisioning compensated by beat on operating

performance leading to inline PAT % Change (Y-o-Y) 20 20

Source: MOSL, Company

Strong traction loan growth across segments Reported loans grew 28% YoY and 10% QoQ, driven by strong growth across

segments. Retail (based on internal classification) loans grew +10% QoQ and +29% YoY and corporate grew +9% QoQ and +26% YoY (v/s 17% YoY in 1QFY16).

Sequential growth in retail loans was mainly driven by strong growth in a) business banking (+13% QoQ and +24% YoY v/s 19% YoY in 1QFY16), b) personal loan (+12% QoQ, +39% YoY v/s 34% YoY in 1Q), c) Kissan Gold Card (+16% QoQ, +51% YoY v/s 52% YoY in 1Q); d) CV/CE loans grew 9% QoQ (18% YoY) v/s +6% QoQ (14% YoY) in 1QFY16.

Strong sequential corporate loan growth was driven by large corporate demand seen post sharp base rate cut (35bp cut in August end) and increasing demand from emerging corporate book (ECB). Overall average interest earning assets increased 30% YoY (+7% QoQ) as against 26% YoY in 1QFY16.

Corporate and international loans forms ~37% of the loan book v/s ~38% in 2QFY15.

NIM moderates further; CASA ratio remains stable at ~40% Reported NIM moderated 10bp QoQ to 4.2% - impacted by base rate cut and

high growth in corporate loans. Cost of funds was stable QoQ, despite strong growth seen in term deposits growth in 1Q (+38% YoY and +16% QoQ). Overall NII growth (21% YoY and +5% QoQ) was much lower than loan growth.

CASA deposits grew 19% YoY and +5% QoQ v/s 20% YoY a quarter ago. SA deposits grew by +5% QoQ (19% YoY) v/s flat QoQ in 1QFY16. Healthy growth in fee income continues HDFCB reported strong growth in non-interest income (25% YoY), led by

continued traction in fees (+22% YoY, similar to the last quarter) and FX income (+44% YoY).

Fee income growth was driven by (a) strong traction in retail loan processing, (b) pick-up in third party distribution fees (especially life insurance) and (b) wholesale linked fees.

CV segment growth driven by MHCV segment – which

is driven by replacement demand and regulatory

changes

Reported NIM decline 30bp in past three quarters

Fee income growth remains strong at 20% + YoY (3rd

quarter in a row)

21 October 2015 3

HDFC Bank

Opex growth trails revenue growth Overall opex grew by +20% YoY (5% QoQ) v/s 26% YoY in 1QFY16 – lower than

22% revenue growth; led by stable staff cost growth (+21% YoY, similar to 1Q). The bank added ~4,000 employees during the quarter (v/s 1400 in 1Q), taking the overall number of employees to ~83400 (11% YoY).

Other operating expense grew by 5% QoQ –led by steady branch addition partly offset by ATM network rationalization (-286 QoQ).

Cost-to-income ratio remained stable QoQ at ~45%. As the branches mature, the management expects the ratio to stabilize/decline over the medium term.

Net stress loans lowest at 35bp On a sequential basis asset quality movement remains stable QoQ (based on

Basel III disclosures). In absolute terms, GNPA increased 12% QoQ while NNPA increased 15% QoQ.

In percentage terms, GNPA ratio remained broadly stable at 0.95% (+2bp QoQ) while NNPA ratio increased to 0.27% (+7bp QoQ). Restructured standard loan portfolio remained stable QoQ at 0.1% of loans. Consequently, net stress loans increased marginally to 37bp v/s 30bp last quarter.

Other highlights During the quarter, bank added 126 branches (v/s 87 in 1QFY16) and reduced

the number of ATMs by 286 (v/s + 186 in 1Q). CAR stood at 15.5%, with Tier 1 at 12.8% - stable QoQ. 2QFY16 conference call highlights BS Related Strong traction in corporate loan growth was driven by large corporate demand

(lowest base rate in Sept-15) and increasing demand from existing emerging corporate customers

HDFCB continues to gain market share in CV/CE (led by MHCV essentially driven by replacement demand and partly from regulatory change)

Growth in two and four wheeler segment was driven by market share gain and higher ticket size

Off late, HDFCB has also started taking non PSL home loan book on the balance sheet from HDFC Ltd. In the past, HDFCB was taking 40-50% of the loan origination v/s 70% of the origination now

KGC loans share in the overall loans are not yet at the desired level. Thus, catch up is leading to strong loan growth; Entire book qualifies for direct agri lending

Loan against property book currently growing in lower 20s; lending is primarily based on cash flows

FCNR deposits are maturing in Oct-16 Other highlights Branch expansion is driven by a) adding new location (half of the new branches

in new locations) b) focus on customer acquisition and then move customers from physical to digital channels

21 October 2015 4

HDFC Bank

Margins will remain in the range of 4.1-4.4%, despite the high competition in retail loans, helped by re-pricing of deposits and high share of fixed rate book; currently, HDFCB is on marginal cost of funds for calculating base rate. However, some components will go under change post the final guidelines from RBI

During the quarter strong growth in fees is driven by a) strong growth in third party distribution fees especially in life insurance b) credit card interchange fees and c) business banking and ECG wholesale fees

As the higher origination of loans will happen through digital channel, cost to income ratio will lower in the medium term

Out 8-9 segments for retail fees, top 3 contributors are a) Third party distribution (largest; accounts for 12-13% of overall fees) b) cards business and c) Transaction fees

Risk weighted assets stood at INR4.9 trillion as of Sep-15 Stock of outstanding floating provision stands at INR16.4b Valuation and view Structural drivers in place with (1) CASA ratio of ~40%, (2) growth outlook of at

least 1.3x the industry growth, (3) improving operating efficiency led by digitalization initiatives, (4) expected traction in income due to strong expansion in branch network, and (5) best-in-class asset quality.

Retail loan growth is seeing a strong revival with the contribution from high ROE retail products like unsecured personal loans, LAS and Credit cards going up. Despite the moderate growth in underlying assets like Auto, CV and CE loans – HDFCB is seeing the strong loan growth-Indicating a market share gain. Base rate will continue to be the lowest in the system, helped lowest cost of funds (funded by retail liabilities), which will lead to market share gain in wholesale business. Impact of Base Rate cut will be significantly lower for HDFCB as only 30% of book linked to base rate v/s 65-70% for peer bank.

Led by strong loan growth revenue growth remains very healthy at ~22% over last five quarter, which is giving bank avenues to expand aggressively (branches up 17% YoY, headcount up 11% YoY) and invest in the digitalization without much impact on cost ratios (C/I ratio remains in the range of 45-47%). With growth momentum remaining healthy, core revenues are expected to remain 20%+ from hereon.

Despite pricing pressure, NIMs are expected to remain at the current levels as a) CASA growth will pick up, b) benefit of falling rate cycle will occur due to high share of fixed rate retail loans (~70% of book) and c) high-yielding retail loans contribution will rise.

The biggest risk to earnings for private financials is the implementation of dynamic provisioning by RBI, wherein HDFCB is best placed due to floating provisions created during the last three years. HDFCB carries floating provisions of ~INR17b—created to smoothen earnings growth led by better-than-factored credit cost on retail loans.

Earnings CAGR of 20% (best amongst the large private banks), with core income growth pick-up led by healthy loan growth, superior NIMs, gradual improvement in fee income and operating efficiencies led by digital initiatives .

Over the last 12 years, HDFCB’s market share has increased significantly in (1) retail loans, (2) low-cost deposits and (3) profitability, indicating the strength of

Buy with a target price of INR1,350 (4x FY17E BV)

21 October 2015 5

HDFC Bank

its franchisee. Strong fundamentals and near-nil stress loans would enable the bank to gain market share. RoEs are expected to be the best amongst private banks at ~20%. The stock trades at FY17 PBV/PE of 3.3x/18.5x.

We maintain Buy with the target price of INR1350 (4x PBV FY17) based on the residual income growth model. Our key assumptions are a) Risk free rate of 7.5% b) Risk premium of 5% c) Beta of 0.9x d) average growth of ~15% over FY15-35E and e) terminal growth rate of 5%.

Exhibit 2: One year forward P/BV

Source: Company, MOSL

Exhibit 3: One year forward P/E


Exhibit 4: DuPont Analysis: Improvement in risk adjusted NIMs and operating leverage; RoAs near decadal high (%) Y/E March FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Net Interest Income 5.03 4.85 4.28 4.40 4.19 4.28 4.14 4.14 4.16 4.09 4.08 Core Fee Income 1.57 1.46 1.49 1.39 1.37 1.34 1.30 1.23 1.21 1.16 1.12

Fee to core Income 23.8 23.1 25.9 24.0 24.6 23.9 23.8 22.9 22.5 22.2 21.5 Core Income 6.60 6.31 5.77 5.79 5.56 5.63 5.44 5.37 5.37 5.26 5.19 Operating Expenses 3.84 3.76 3.19 3.11 3.02 3.04 2.70 2.59 2.64 2.57 2.53

Cost to Core Income 58.2 59.6 55.3 53.8 54.3 54.1 49.6 48.1 49.2 48.9 48.6 Employee cost 1.16 1.41 1.13 1.13 1.11 1.07 0.94 0.88 0.87 0.86 0.85 Others 2.68 2.35 2.06 1.98 1.91 1.97 1.76 1.71 1.77 1.71 1.67 Core operating Profits 2.75 2.55 2.58 2.67 2.54 2.58 2.74 2.79 2.73 2.68 2.67 Trading and others 0.66 0.88 0.76 0.59 0.51 0.51 0.48 0.43 0.46 0.42 0.39 Operating Profits 3.41 3.43 3.34 3.27 3.05 3.10 3.22 3.22 3.19 3.11 3.06 Provisions 1.38 1.34 1.23 0.94 0.61 0.45 0.36 0.38 0.33 0.35 0.36

NPA 1.14 1.25 1.13 0.48 0.35 0.33 0.37 0.32 0.31 0.32 0.33 Others 0.24 0.10 0.10 0.46 0.26 0.12 -0.01 0.07 0.02 0.03 0.03

PBT 2.03 2.09 2.11 2.33 2.44 2.64 2.86 2.83 2.86 2.76 2.70 Tax 0.62 0.67 0.66 0.76 0.76 0.82 0.96 0.94 0.97 0.90 0.88

Tax Rate 30.3 32.0 31.3 32.5 31.2 31.0 33.6 33.4 34.0 32.5 32.5 RoA 1.42 1.42 1.45 1.57 1.68 1.82 1.90 1.89 1.89 1.86 1.82

Leverage (x) 12.5 11.9 11.1 10.7 11.1 11.2 11.2 10.3 9.8 10.3 10.9 RoE 17.7 16.9 16.1 16.7 18.7 20.3 21.3 19.4 18.4 19.2 19.9


3.5

5.0

3.4

1.9 1.5

2.5

3.5

4.5

5.5

Oct

-05

Jan-

07

Apr-

08

Jul-0

9

Oct

-10

Jan-

12

Apr-

13

Jul-1

4

Oct

-15

PB (x) Peak(x) Avg(x) Min(x)

19.7

35.1

21.1

13.9 10

18

26

34

42

Oct

-05

Jan-

07

Apr-

08

Jul-0

9

Oct

-10

Jan-

12

Apr-

13

Jul-1

4

Oct

-15

PE (x) Peak(x) Avg(x) Min(x)

21 October 2015 6

HDFC Bank

Exhibit 5: DuPont Analysis: Stable core operating performance led to stable return ratios 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 NII 4.38 4.33 4.23 4.12 4.13 4.21 4.40 4.36 4.27 4.19 4.15 Fees (ex-forex) 1.41 1.26 1.28 1.40 1.27 1.14 1.23 1.38 1.30 1.12 1.16

Fees to core Inc. 32.2 29.1 30.3 34.0 30.7 27.2 27.9 31.7 30.5 26.8 28.0 Core Income 5.79 5.59 5.50 5.52 5.40 5.35 5.63 5.75 5.58 5.31 5.30 Operating Expenses 3.20 2.98 2.77 2.58 2.65 2.59 2.79 2.65 2.74 2.62 2.60

C to Core Inc (%) 55.2 53.3 50.3 46.6 49.0 48.3 49.6 46.0 49.1 49.4 49.0 Employee Expenses 1.03 1.09 0.98 0.87 0.88 0.92 0.93 0.87 0.94 0.89 0.88 Other Expenses 2.17 1.89 1.79 1.71 1.76 1.67 1.86 1.78 1.80 1.73 1.72 Core Oper. Profit 2.59 2.61 2.73 2.95 2.75 2.77 2.84 3.10 2.84 2.69 2.71 Trading and others 0.43 0.63 0.46 0.51 0.40 0.36 0.41 0.56 0.52 0.49 0.42 Operating Profit 3.02 3.24 3.20 3.46 3.15 3.13 3.24 3.66 3.36 3.18 3.13 Provisions 0.31 0.52 0.36 0.35 0.24 0.39 0.36 0.43 0.41 0.48 0.42 PBT 2.72 2.72 2.83 3.11 2.91 2.74 2.88 3.23 2.95 2.70 2.71 Tax 0.79 0.92 0.96 1.04 0.97 0.92 0.98 1.09 0.95 0.94 0.93

Tax Rate 29.0 33.6 33.9 33.5 33.4 33.6 33.9 33.8 32.3 34.6 34.2 ROA 1.93 1.81 1.87 2.07 1.94 1.82 1.90 2.14 2.00 1.77 1.78

Leverage (x) 10.9 10.9 10.7 10.8 11.1 11.0 10.6 10.4 9.9 9.6 9.7 ROE 21.1 19.8 20.1 22.3 21.5 20.0 20.1 22.3 19.8 17.0 17.2


21 October 2015 7

HDFC Bank

Story in charts

Exhibit 6: Robust loan growth driven by improving traction across segments


Exhibit 7: Deposits growth driven by strong growth in term deposits


Exhibit 8: Strong CASA deposit growth continues; CASA ratio remains stable QoQ


Exhibit 9: Reported margins decline QoQ while calculated margins remain broadly stable


Exhibit 10: Retail loan growth close to 30% levels (based on internal classification) – now stands at ~63% of loan book Loan Break-up (INR b)

% of loans 1HFY16 1HFY15 YoY Gr

(%) 1QFY16 QoQ Gr (%)

Auto 12.8 536 440 21.8 501 7.1 PL 7.7 324 233 38.9 291 11.6 LAS 0.4 15 11 42.5 13 13.7 2Wheerlers 1.4 58 45 28.1 53 9.1 CV and CE 6.9 290 245 18.4 265 9.4 CC 4.3 180 140 28.5 169 6.7 Bus. Banking 13.7 575 465 23.6 510 12.8 Home loans 6.8 285 196 45.6 269 5.9 Gold loans 1.0 43 39 12.5 42 2.5 Kissan gold cards 4.7 195 129 51.2 169 15.6 Others 2.9 121 85 41.2 107 12.2 Retail loans 62.7 2,622 2,028 29.3 2,389 9.8 Corp and International 37.3 1,563 1,244 25.6 1,432 9.2

Total loans 100.0 4,185 3,273 27.9 3,820 9.6 Source: MOSL, Company

Exhibit 11: Proportion of CV/CE loans stabilizes


1,75

5 1,

885

1,94

3 1,

954

2,13

3 2,

316

2,41

5 2,

397

2,58

6 2,

686

2,96

7 3,

030

3,12

1 3,

273

3,47

1 3,

655

3,82

0 4,

185

20 20 22 22 22 23 24 23 21 16 23 26

21 22 17 21 22 28

1QFY

121H

FY12

9MFY

12FY

121Q

FY13

1HFY

139M

FY13

FY13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

Loans (INR b) YoY Growth (%)

2,11

2 2,

307

2,32

5 2,

467

2,57

5 2,

741

2,84

1 2,

962

3,03

3 3,

130

3,49

2 3,

673

3,72

1 3,

907

4,14

1 4,

508

4,84

2 5,

069

15 18 21 18 22 19 22 20 18 14 23 24 23 25

19 23 30 30

1QFY

121H

FY12

9MFY

12FY

121Q

FY13

1HFY

139M

FY13

FY13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

Deposits (INR b) YoY Gr (%)

1036

10

92

1129

11

94

1184

12

73

1289

14

05

1356

14

09

1434

16

46

1600

16

86

1694

19

85

1919

20

13

49

47

48

48

46

46

45 47

45

45

44

45

43

43

41 44

40

40

1QFY

121H

FY12

9MFY

12FY

121Q

FY13

1HFY

139M

FY13

FY13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

CASA Deposits (INR b) CASA Ratio (%)

4.2 4.1 4.1

4.4

4.6

4.4 4.3

4.6 4.6

4.3 4.2

4.4 4.4 4.5

4.4 4.4 4.3

4.2

1QFY

122Q

FY12

3QFY

124Q

FY12

1QFY

132Q

FY13

3QFY

134Q

FY13

1QFY

142Q

FY14

3QFY

144Q

FY14

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

6.7

6.8

7.1

6.8

6.7

6.5

6.3

5.6

4.8

4.3

4.2

3.8

3.5

3.5

3.5

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

1HFY

15

9MFY

15

FY15

1QFY

16

1HFY

16%age of overall loans

21 October 2015 8

HDFC Bank

Story in charts

Exhibit 12: Fee income growth healthy – three consecutive quarters of 20%+ YoY growth


Exhibit 13: CD Ratio spikes back to 80%+ levels


Exhibit 14: ATMs decline QoQ (286) while branch addition continues (126 added); added 627branches in last one year


Exhibit 15: GNPA ratio largely remains stable


9.3

9.9

11.4

12

.5

11.5

12

.2

14.1

13

.8

12.8

13

.5

15.8

15

.2

14.1

15

.4

18.1

18

.3

17.1

18

.7

1.3 1.3 1.4 1.5 1.3 1.3 1.5 1.4 1.3 1.3 1.4 1.3 1.1 1.2 1.4 1.3

1.1 1.2

1QFY

122Q

FY12

3QFY

124Q

FY12

1QFY

132Q

FY13

3QFY

134Q

FY13

1QFY

142Q

FY14

3QFY

144Q

FY14

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

Fee Inc.(INR b) Fee Inc. as % of Avg. Assets

83 82 84

79

83 85 85

81

85 86 85

82

84 84 84 81

79

83

1QFY

121H

FY12

9MFY

12FY

121Q

FY13

1HFY

139M

FY13

FY13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

CD Ratio

2,11

1 2,

150

2,20

1 2,

544

2,56

4 2,

620

2,77

6 3,

062

3,11

9 3,

251

3,33

6 3,

403

3,48

8 3,

600

3,65

9 4,

014

4,10

1 4,

227

5,99

8 6,

520

7,11

0 8,

913

9,70

9 10

,316

10

,490

10

,743

11

,088

11

,177

11

,473

11

,256

11

,428

11

,515

11

,633

11

,766

11

,952

11

,666

1QFY

121H

FY12

9MFY

12FY

121Q

FY13

1HFY

139M

FY13

FY13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

Branches ATM

1.0 1.0 1.0 1.0 1.0 0.9 1.0 1.0 1.0 1.1 1.0 1.0 1.1 1.0 1.0 0.9 1.0 0.9

0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.2 0.3 0.3 0.3 0.3 0.2 0.3 0.3

1QFY

121H

FY12

9MFY

12FY

121Q

FY13

1HFY

139M

FY13

FY13

1QFY

141H

FY14

9MFY

14FY

141Q

FY15

1HFY

159M

FY15

FY15

1QFY

161H

FY16

Gross NPAs (%) Net NPAs (%)

21 October 2015 9

HDFC Bank

Exhibit 16: Quarterly Snapshot FY14 FY15 FY16 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY Profit and Loss (INR m) Net Interest Income 44,187 44,765 46,348 49,527 51,716 55,110 56,999 60,132 63,888 66,809 5 21 Other Income 19,256 18,444 21,483 20,014 18,506 20,471 25,349 25,638 24,619 25,518 4 25 Trading profits 1,995 -1,733 509 333 250 951 2,655 1,961 1,259 1,624 29 71 Exchange Profits 3,143 5,014 3,332 2,521 2,242 2,217 2,534 3,287 3,480 3,196 -8 44 Others (Ex non core) 14,118 15,163 17,642 17,160 16,014 17,303 20,160 20,390 19,880 20,698 4 20 Total Income 63,443 63,209 67,830 69,541 70,222 75,581 82,348 85,769 88,507 92,327 4 22 Operating Expenses 30,382 29,342 28,951 31,747 31,784 34,979 34,563 38,550 40,008 41,898 5 20 Employee 11,091 10,357 9,730 10,612 11,259 11,669 11,325 13,256 13,590 14,140 4 21 Others 19,291 18,985 19,221 21,135 20,525 23,310 23,238 25,294 26,418 27,758 5 19 Operating Profits 33,061 33,867 38,880 37,794 38,438 40,602 47,786 47,220 48,499 50,429 4 24 Provisions 5,271 3,859 3,888 2,861 4,828 4,559 5,604 5,767 7,280 6,813 -6 49 PBT 27,790 30,007 34,991 34,933 33,610 36,043 42,181 41,453 41,219 43,616 6 21 Taxes 9,351 10,184 11,734 11,667 11,280 12,228 14,236 13,384 14,262 14,922 5 22 PAT 18,439 19,823 23,257 23,266 22,330 23,815 27,945 28,069 26,957 28,695 6 20 Asset Quality GNPA 27,190 29,417 30,178 29,893 33,562 33,617 34,679 34,384 38,522 38,278 -1 14 NNPA 6,890 7,672 7,973 8,200 10,074 9,173 9,037 8,963 10,277 10,377 1 13 GNPA (%) 1.0 1.1 1.0 1.0 1.1 1.0 1.0 0.9 1.0 0.9 -4 -11 NNPA (%) 0.3 0.3 0.2 0.3 0.3 0.3 0.3 0.2 0.3 0.3 -2 -3 PCR (Calculated, %) 74.7 73.9 73.6 72.6 70.0 72.7 73.9 73.9 73.3 72.9 -43 18 Ratios (%) Fees to Total Income 22.3 24.0 26.0 24.7 22.8 22.9 24.5 23.8 22.5 22.4 Cost to Core Income 49.4 45.2 43.0 45.9 45.4 46.9 43.4 46.0 45.9 46.2 Tax Rate 33.6 33.9 33.5 33.4 33.6 33.9 33.8 32.3 34.6 34.2 CASA (Reported) 44.7 45.0 43.7 44.8 43.0 43.2 40.9 44.0 39.6 40.0 Loan/Deposit 85.3 85.8 85.0 82.5 83.9 83.8 83.8 81.1 78.9 82.6 RoA 1.8 1.9 2.1 1.9 1.8 1.9 2.1 2.0 1.8 1.8 RoE 19.8 20.1 22.3 21.5 20.0 20.1 22.3 19.8 17.0 17.2 Margins (%) - Calculated Yield on loans 11.8 11.7 11.6 11.3 11.4 11.4 11.3 11.0 11.2 10.9 -24 -41 Yield On Investments 8.2 8.9 8.7 7.7 7.4 8.6 8.6 7.6 7.7 7.9 16 -68 Yield on funds 10.5 10.8 10.6 10.0 10.4 10.7 10.5 10.1 10.1 10.1 1 -60 Cost of funds 6.2 6.5 6.4 5.8 5.9 6.0 6.1 5.9 6.0 5.9 -2 -10 Spreads 4.3 4.3 4.2 4.2 4.4 4.7 4.4 4.2 4.2 4.2 3 -50 Margins 4.8 4.8 4.6 4.6 4.8 5.0 4.8 4.7 4.6 4.6 -2 -41 Margins (%) - Reported 4.6 4.3 4.2 4.4 4.4 4.5 4.4 4.4 4.3 4.2 -10 -30


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HDFC Bank

Exhibit 17: Quarterly Snapshot continued FY14 FY15 FY16 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY Balance Sheet (INR b) ESC 5 5 5 5 5 5 5 5 5 5 0 4 Reserves and Surplus 379 400 424 430 456 482 512 615 645 678 5 41 Net Worth 384 405 429 435 460 487 517 620 650 683 5 40 Deposits 3,033 3,130 3,492 3,673 3,721 3,907 4,141 4,508 4,842 5,069 5 30 Borrowings+Sub Debt 391 393 438 394 386 385 397 452 469 523 11 36 Other Liabilities 355 383 322 413 346 320 294 325 332 325 -2 2 Total Liabilities 4,163 4,312 4,681 4,916 4,914 5,100 5,349 5,905 6,293 6,600 5 29 Cash 190 199 213 253 221 204 210 275 244 257 5 26 Money at call 64 81 139 142 80 113 121 88 143 78 -46 -31 Investments 1,048 1,019 1,106 1,210 1,088 1,154 1,340 1,516 1,724 1,713 -1 48 Advances 2,586 2,686 2,967 3,030 3,121 3,273 3,471 3,655 3,820 4,185 10 28 Total earning assets 3,699 3,786 4,213 4,382 4,290 4,540 4,931 5,260 5,687 5,976 5 32 Fixed Assets 29 29 29 29 29 29 29 31 32 32 1 11 Other Assets 246 297 226 251 374 327 178 339 331 335 1 2 Total Assets 4,163 4,312 4,681 4,916 4,914 5,100 5,349 5,905 6,293 6,600 5 29 Loan Break Up (%) Retail 54.3 53.6 49.7 49.4 48.1 48.3 47.5 47.3 49.0 48.8 -17 53

Auto Loans 12.5 12.1 11.3 10.9 11.1 11.5 11.5 11.1 11.4 11.0 -38 -55 Personal Loans 7.2 7.2 6.8 6.7 6.9 7.1 7.1 7.1 7.5 7.6 7 55 Loan against securities 0.4 0.4 0.3 0.4 0.3 0.3 0.3 0.4 0.3 0.3 0 -6 Two wheeler 1.2 1.2 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 -2 2 CV & CE 6.5 6.3 5.6 4.8 4.3 4.2 3.8 3.5 3.5 3.5 3 -70 Credit Cards 4.1 4.0 3.9 4.0 4.3 4.3 4.4 4.4 4.4 4.3 -11 2 Business Banking 9.2 9.6 9.0 8.3 7.1 6.7 6.1 5.2 6.3 6.5 23 -19 Home loans 6.6 6.1 5.4 6.4 6.3 6.0 5.8 6.6 7.0 6.8 -23 83 Gold loans 1.8 1.6 1.4 1.3 1.2 1.2 1.1 1.1 1.1 1.0 -8 -15 Kissan Gold Cards 2.9 2.9 3.5 3.5 3.9 3.9 4.4 4.4 4.6 23 65 Other Retail loans 2.3 2.2 1.9 2.0 2.0 2.0 2.1 2.4 2.0 2.1 9 12

Corp. & International 45.7 46.4 50.3 50.6 51.9 51.7 52.5 52.7 51.0 51.2 17 -53 Franchise Branches 3,119 3,251 3,336 3,403 3,488 3,600 3,659 4,014 4,101 4,227 3 17 ATM 11,088 11,177 11,473 11,256 11,428 11,515 11,633 11,766 11,952 11,666 -2 1

Note: Retail loan break-up is based on regulatory classification Source: Company, MOSL

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HDFC Bank

Exhibit 18: Financials - Valuation metrics 66 Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%)

(INR) (USDb) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 ICICIBC* Buy 286 25.1 21.5 25.8 10.3 8.2 131 150 1.69 1.42 1.54 1.58 14.8 15.7 HDFCB Buy 1,095 41.6 49.1 59.2 22.3 18.5 285 330 3.84 3.31 1.89 1.86 18.4 19.2 AXSB Buy 509 18.3 36.5 43.3 13.9 11.8 218 254 2.33 2.01 1.78 1.82 18.0 18.3 KMB* Neutral 655 18.1 18.2 25.3 36.0 25.9 182 207 3.59 3.16 1.01 1.32 13.9 14.5 YES Buy 770 4.9 59.9 74.5 12.9 10.3 327 387 2.35 1.99 1.68 1.73 19.7 20.9 IIB Buy 957 8.5 41.3 51.3 23.2 18.7 295 340 3.24 2.82 2.04 2.08 17.6 16.1 DCBB Sell 92 0.4 5.4 5.8 17.1 15.8 60 66 1.53 1.39 0.84 0.73 9.3 9.2 FB Neutral 65 1.7 5.4 6.7 12.1 9.7 49 54 1.33 1.20 1.02 1.06 11.4 13.0 JKBK Neutral 90 0.7 14.1 17.3 6.4 5.2 136 150 0.66 0.60 0.85 0.92 10.7 12.1 SIB Buy 22 0.5 2.5 3.1 8.8 7.3 29 31 0.79 0.73 0.55 0.58 9.4 10.3 Private Aggregate 119.7 18.1 15.1 2.74 2.40 SBIN (cons)* Buy 254 29.2 25.6 31.7 9.5 7.6 229 255 1.06 0.95 0.70 0.77 11.7 13.1 PNB Buy 138 3.9 19.6 26.8 7.0 5.2 220 244 0.63 0.57 0.57 0.70 9.3 11.6 BOI Neutral 142 1.4 19.4 27.1 7.4 5.3 410 432 0.35 0.33 0.20 0.25 4.8 6.4 BOB Buy 176 1.2 20.3 25.1 8.7 7.0 182 201 0.97 0.88 0.61 0.68 11.7 13.1 CBK Buy 300 2.3 43.8 59.7 6.9 5.0 573 619 0.52 0.49 0.39 0.48 8.1 10.0 UNBK Buy 174 1.7 35.7 46.6 4.9 3.7 317 356 0.55 0.49 0.56 0.65 11.8 13.9 OBC Buy 145 0.7 46.3 63.8 3.1 2.3 474 523 0.31 0.28 0.57 0.69 10.1 12.8 INBK Buy 137 1.0 21.1 30.6 6.5 4.5 278 301 0.49 0.45 0.50 0.65 7.8 10.6 CRPBK Neutral 45 0.1 16.5 21.9 2.7 2.1 141 158 0.32 0.29 0.54 0.64 12.3 14.7 ANDB Buy 70 0.6 17.8 22.8 3.9 3.1 180 196 0.39 0.36 0.55 0.62 10.3 12.2 IDBI Neutral 85 2.1 14.4 19.7 5.9 4.3 157 173 0.54 0.49 0.58 0.69 9.5 11.9 DBNK Neutral 43 0.4 8.8 12.5 4.8 3.4 126 136 0.34 0.31 0.36 0.44 7.2 9.6 Public Aggregate 44.5 8.0 6.2 0.73 0.66 HDFC* Buy 1,313 31.3 38 44 22.8 18.0 167 192 5.21 4.11 2.60 2.60 23.6 24.4 LICHF Buy 473 3.6 34 42 14.0 11.2 182 216 2.60 2.19 1.48 1.55 20.1 21.3 DEWH Buy 237 1.0 26 33 9.0 7.2 179 204 1.32 1.16 1.27 1.29 15.6 17.3 IHFL Buy 738 4.8 57 72 12.9 10.3 275 305 2.68 2.42 4.08 4.19 26.5 24.7 GRHF Buy 254 1.4 7 9 37.4 29.7 24 28 10.75 8.93 2.18 2.05 28.9 28.6 REPCO Buy 693 0.7 24 34 28.3 20.3 152 182 4.57 3.81 2.20 2.32 17.3 20.4 IDFC Buy 62 1.5 10 12 6.3 5.3 107 116 0.31 0.27 1.75 1.83 8.8 9.8 RECL Buy 260 3.9 63 76 4.1 3.4 302 360 0.86 0.72 3.22 3.23 22.9 22.9 POWF Buy 245 4.9 54 60 4.5 4.1 285 329 0.86 0.75 3.07 3.03 20.4 19.7 SHTF Buy 974 3.3 62 73 15.6 13.4 458 515 2.13 1.89 2.10 2.28 14.1 14.9 MMFS Buy 242 2.1 12 15 20.1 16.0 109 120 2.22 2.02 1.92 2.20 11.5 13.2 BAF Buy 5,306 4.3 222 261 23.9 20.3 1,350 1,568 3.93 3.38 3.13 2.84 19.8 17.9 MUTH Buy 188 5.7 20 24 12.2 10.2 141 156 1.72 1.55 2.75 2.83 14.7 16.0 NBFC Aggregate 62.8 15.6 13.3 2.73 2.39


*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries

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HDFC Bank

Financials and valuations

Income Statement (INR Million) Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E Interest Income 203,808 278,742 350,649 411,355 484,699 598,286 707,423 875,322 Interest Expense 93,851 149,896 192,538 226,529 260,742 326,693 378,598 475,175 Net Interest Income 109,957 128,846 158,111 184,826 223,957 271,593 328,826 400,147 Change (%) 26.7 17.2 22.7 16.9 21.2 21.3 21.1 21.7 Non-Interest Income 49,452 57,836 68,526 79,196 89,964 108,429 126,345 147,312 Net Income 159,409 186,682 226,637 264,023 313,920 380,022 455,170 547,459 Change (%) 20.3 17.1 21.4 16.5 18.9 21.1 19.8 20.3 Operating Expenses 77,800 92,776 112,361 120,422 139,875 168,326 199,774 237,113 Pre Provision Profits 81,609 93,906 114,276 143,601 174,045 211,697 255,396 310,346 Change (%) 20.4 15.1 21.7 25.7 21.2 21.6 20.6 21.5 Provisions (excl tax) 23,422 18,774 16,770 15,880 20,758 24,523 33,624 43,905 PBT 58,187 75,132 97,506 127,721 153,287 187,173 221,772 266,441 Tax 18,923 23,461 30,249 42,937 51,128 64,107 73,185 87,926 Tax Rate (%) 32.5 31.2 31.0 33.6 33.4 34.3 33.0 33.0 PAT 39,264 51,671 67,257 84,784 102,159 123,066 148,588 178,516 Change (%) 33.2 31.6 30.2 26.1 20.5 20.5 20.7 20.1 Equity Dividend (Incl tax) 8,948 11,749 15,360 19,275 24,142 28,674 34,621 41,594 Core PPP* 68,179 79,428 97,607 122,227 150,674 182,290 222,119 272,673 Change (%) 30.7 16.5 22.9 25.2 23.3 21.0 21.8 22.8 *Core PPP is (NII+Fee income-Opex)

Balance Sheet (INR Million) Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E Equity Share Capital 4,652 4,693 4,759 4,798 5,013 5,013 5,013 5,013 Reserves & Surplus 249,140 294,553 357,383 429,988 615,081 709,473 823,440 960,361 Net Worth 253,793 299,247 362,141 434,786 620,094 714,486 828,453 965,374 Deposits 2,085,864 2,467,064 2,962,470 3,673,375 4,507,956 5,589,866 6,987,332 8,734,166 Change (%) 24.6 18.3 20.1 24.0 22.7 24.0 25.0 25.0 of which CASA Dep 1,099,083 1,194,059 1,405,215 1,646,214 1,984,921 2,381,905 2,888,268 3,502,500 Change (%) 26.2 8.6 17.7 17.2 20.6 20.0 21.3 21.3 Borrowings 143,941 238,465 330,066 394,390 452,136 526,532 616,225 727,280 Other Liabilities & Prov. 289,929 374,319 348,642 413,444 324,845 359,279 397,830 440,916 Total Liabilities 2,773,526 3,379,095 4,003,319 4,915,995 5,905,031 7,190,164 8,829,840 10,867,736 Current Assets 296,688 209,377 272,802 395,836 363,315 354,805 441,601 563,806 Investments 709,294 974,829 1,116,136 1,209,511 1,516,418 1,895,522 2,274,627 2,729,552 Change (%) 21.0 37.4 14.5 8.4 25.4 25.0 20.0 20.0 Loans 1,599,827 1,954,200 2,397,206 3,030,003 3,654,950 4,532,138 5,665,173 7,081,466 Change (%) 27.1 22.2 22.7 26.4 20.6 24.0 25.0 25.0 Fixed Assets 21,706 23,472 27,031 29,399 31,217 34,654 38,091 41,528 Other Assets 146,011 217,216 190,144 251,246 339,131 373,044 410,349 451,383 Total Assets 2,773,526 3,379,095 4,003,319 4,915,995 5,905,031 7,190,164 8,829,840 10,867,736 Asset Quality (%) Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E GNPA (INR m) 16,943 19,994 23,346 29,893 34,384 43,263 61,840 90,584 NNPA (INR m) 2,964 3,523 4,690 8,200 8,963 10,327 13,313 18,817 GNPA Ratio 1.0 1.0 1.0 1.0 0.9 0.9 1.1 1.3 NNPA Ratio 0.2 0.2 0.2 0.3 0.2 0.2 0.2 0.3 PCR (Excl Tech. write off) 82.5 82.4 79.9 72.6 73.9 76.1 78.5 79.2 E: MOSL Estimates

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HDFC Bank

Financials and valuations

Ratios Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E Spreads Analysis (%) Avg. Yield-Earning Assets 9.4 10.4 10.6 10.3 10.1 10.1 9.7 9.7 Avg. Yield on loans 10.9 11.9 12.3 11.7 11.1 10.9 10.4 10.4 Avg. Yield on Invt 7.2 7.7 7.5 7.8 7.2 8.0 7.6 7.6 Avg. Cost-Int. Bear. Liab. 4.7 6.1 6.4 6.2 5.8 5.9 5.5 5.6 Avg. Cost of Deposits 4.3 5.6 6.0 5.7 5.7 5.9 5.5 5.5 Interest Spread 4.7 4.4 4.2 4.1 4.3 4.2 4.2 4.1 Net Interest Margin 5.1 4.8 4.8 4.6 4.6 4.6 4.5 4.4 Profitability Ratios (%) RoE 16.7 18.7 20.3 21.3 19.4 18.4 19.3 19.9 RoA 1.6 1.7 1.8 1.9 1.9 1.9 1.9 1.8 Int. Expense/Int.Income 46.0 53.8 54.9 55.1 53.8 54.6 53.5 54.3 Fee Income/Net Income 27.5 29.3 27.3 27.2 24.5 24.2 23.9 23.5 Non Int. Inc./Net Income 31.0 31.0 30.2 30.0 28.7 28.5 27.8 26.9 Efficiency Ratios (%) Cost/Income* 48.6 49.2 49.9 45.8 47.0 46.7 46.3 45.6 Empl. Cost/Op. Exps. 36.5 36.6 35.3 34.7 34.0 34.2 34.5 34.9 Busi. per Empl. (INR m) 61.5 66.5 72.4 87.9 102.7 112.1 127.8 151.3 NP per Empl. (INR lac) 0.7 0.8 1.0 1.2 1.4 1.5 1.7 1.9 * ex treasury Asset-Liability Profile (%) Loans/Deposit 76.7 79.2 80.9 82.5 81.1 81.1 81.1 81.1 CASA Ratio 52.7 48.4 47.4 44.8 44.0 42.6 41.3 40.1 Investment/Deposit 34.0 39.5 37.7 32.9 33.6 33.9 32.6 31.3 CAR 16.2 16.5 16.8 16.1 16.8 15.5 14.3 13.2 Tier 1 12.2 11.6 11.1 11.8 13.7 12.9 12.1 11.3 Valuation Book Value (INR) 109.1 127 152 181 247 285 331 385 Change (%) 16.0 16.8 19.4 19.2 36.5 15.2 16.0 16.5 Price-BV (x) 4.4 3.8 3.3 2.8 Adjusted BV (INR) 108.2 126.4 150.7 178.9 244.9 282.2 326.8 379.9 Price-ABV (x) 4.5 3.9 3.4 2.9 EPS (INR) 16.9 22.0 28.3 35.3 40.8 49.1 59.3 71.2 Change (%) 31.0 30.4 28.4 25.0 15.3 20.5 20.7 20.1 Price-Earnings (x) 26.9 22.3 18.5 15.4 Dividend Per Sh (INR) 3.3 4.3 5.5 6.9 8.0 9.8 11.9 14.2 Dividend Yield (%) 0.7 0.9 1.1 1.3 E: MOSL Estimates

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HDFC Bank

Corporate profile: HDFC Bank

Exhibit 20: Shareholding pattern (%) Jun-15 Mar-15 Jun-14

Promoter 21.6 21.7 22.6

DII 10.5 9.7 10.0

FII 51.3 51.4 50.9

Others 16.6 17.2 16.6

Note: FII Includes depository receipts

Exhibit 21: Top holders Holder Name % Holding

Aberdeen Global Indian Equity (Mauritius) Ltd 6.9 Aberdeen Global - Asian Smaller Companies Fund 2.0 Bajaj Allianz Life Insurance Company Ltd 1.8 LIC of India Market Plus 1 Growth Fund 1.6 ICICI Prudential Life Insurance Company Ltd 1.4

Exhibit 22: Top management Name Designation

Aditya Puri Managing Director

Paresh Sukthankar Deputy Managing Director

Sashidhar Jagdishan CFO

Exhibit 23: Directors Name Name

Shyamala Gopinath Renu Karnad

Aditya Puri Bobby Parikh*

Paresh Sukthankar Pandit Palande*

A N Roy* Partho S Datta*

Keki Mistry Kaizad Bharucha

*Independent

Exhibit 24: Auditors

Name Type

BSR & Co LLP Statutory

Exhibit 25: MOSL forecast v/s consensus EPS (INR)

MOSL forecast

Consensus forecast

Variation (%)

FY16 49.1 50.1 -2.1

FY17 59.3 61.8 -4.1

FY18 71.2 76.3 -6.7

Company description HDFC Bank amongst the ten private sector bank which were awarded license post liberalization of 1990s. The bank was incorporated in August 1994 and is promoted by the biggest mortgage lender in the country, HDFC Limited (21.6% stake). The bank is now the second largest private sector bank in India with asset size of INR6t+ and market share of ~5% in deposit and loans respectively. As on September 30, 2015, the bank had a network of 4,227 branches and 11,666 ATMs spread across the country.

Exhibit 20: Sensex rebased

21 October 2015 15

HDFC Bank

N O T E S

21 October 2015 16

HDFC Bank

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