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 liberalisation 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. The objective of the Bank was to build sound customer franchises across distinct businesses so as to be the preferred provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the Bank's risk appetite.HDFC Bank’s business philosophy is based on five core values: Operational Excellence, Customer Focus, Product Leadership, People and Sustainability.
As of March 31, 2019, the Bank's distribution network was at 5,103 branches across 2,748 cities. 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. In terms of Technology usage, the Bank uses core banking software for the Corporate Banking business, which is supported by Flexcube, while the Retail Banking business is supported by Finware, both from I-Flex Solutions Ltd. The systems are open, scalable and web-enabled.
HDFC Bank has two subsidiaries, HDB Financial Services Limited (HDBFSL) and HDFC Securities Limited (HSL). HDBFSL is a leading NBFC that caters primarily to the growing needs of an inspirational India, serving both Retail and Small and Medium Commercial Clients. As on March 31, 2019, HDFC Bank held 95.5 per cent stake in the company.HSL is among India’s largest retail broking firms& in March 2019, it had 7 lakhs transacting customers, the third highest number of active (transacting) customers among all broking houses. As on March 31, 2019, HDFC Bank held 97.3 per cent stake in HSL.
Retail Banking: The Bank is a leader in the Auto Loans Segment with a strong presence in passenger, commercial vehicle and 2-wheeler loans. It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in electronic form. The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank distributes Life Insurance, General Insurance and Mutual Funds, often referred to as Third-Party Products. In the Non-Life insurance space, the Bank has increased product offerings, opened new channels, and introduced easy Point-of-Sale Person Certification for distribution of General Insurance and Health Insurance Products. It has also introduced new digital platforms like STP, Upscaler Mobile App, and Insurance helpline.
Wholesale Banking: This business focuses on institutional customers such as Large and Emerging Corporates, SMEs and Government. HDFC Bank’s offerings in this segment include Working Capital and Term Loans as well as Trade Credit, Cash Management, Supply Chain Financing, Foreign Exchange, and Investment Banking services. Corporate Banking, which focuses on large, well-rated companies remained the biggest component of the Wholesale Banking book. Based on its superior product delivery / service levels and strong customer orientation, the Bank has made significant inroads into the banking consortia of a number of leading Indian corporates including multinationals, companies from the domestic business houses and prime public sector companies. It is recognised as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks.
Treasury Within this business, the Bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. To comply with RBI’s statutory reserve requirements, the Bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.
Rationale for Investment
Market Leader in Retail Advances: HDFCBank has leadership position in most of the retail products namely personal loans, business loans, etc. The retail portfolio has grown at a CAGR of 25% over the last 3 years. Retail and corporate constitute 54% and 46% respectively to its loan mix as on March 31, 2019. The share of personal loans (22%) is the highest in the overall retail credit mix followed by auto loans (19%), business banking loans (13%), home loans (12%), credit cards (11%),commercial vehicle / construction equipment (7%), two wheeler (2%), loan against securities (0.4% ~ 0%), and others (14%).
Digital 2.0 Strategy: A key core area for the Bank is digital banking in which its aim is to create a low-cost product which will enhance customer experience and aid customer acquisition as well as retention. Thus, key elements of the Digital 2.0 strategy are A) Reimagined Net and Mobile Banking Experience B) Digital Marketing, Analytics and Digital Origination C) Digital Innovations (like Chatbot) D) API (It is a software intermediary code which rests between the client application / system and Bank system). This allows exchange of data between the Bank and the customer in a seamless and secure manner) E) Virtual Relationship Manager.
Expansion Plans in Rural Areas & smaller Cities: HDFC Bank has built its franchise in semi-urban and rural areas (53% of branches). There are emerging opportunities in this segment; thus the Bank is planning to expand its rural footprint (aims to add 600-700 branches per year versus <100 branches per year over the past three years). With the entire product portfolio and digital edge (cost advantage) the Bank aims to take advantage of growth opportunities without compromising on risk metrics. Additionally, HDFC Bank also plans to leverage common service centres for asset and liability scale up.
Low Cost of Borrowings: HDFC Bank’s current account and saving account deposit (CASA) ratio ranged between 43%-48% over FY14-FY18. For FY19, the ratio stood at the lower end of the range at 42.4%. Higher CASA ratio means a larger portion of a bank's deposits are in current and savings accounts. HDFC Bank has a robust, low-cost funding profile, its reliance on term deposits has been increasing which is also reflected in the 19% yoy growth in term deposits in FY19. Term deposits and borrowings together constituted around 54% of total liabilities in FY19. Resilient Asset Quality: The Bank has one of the best portfolios in terms of quality (wholesale & retail) in the industry on account of strong credit culture, policies & processes. The gross non-performing assets were at 1.36% of gross advances as on March 31, 2019, as against 1.30% as on March 31, 2018. Provision Coverage ratio as on March 31, 2019 was 71%. (It is a measure of a company's ability to service its debt and meet its financial obligations. The higher the coverage ratio, the easier it should be to make interest payments on its debt) . Net non-performing assets were at 0.4% of net advances as on March 31, 2019.
Risk Management: HDFC Bank’s strength lies in its strong credit underwriting skills and risk management, widespread reach in terms of both geographic presence and customer base, wide product offering, strong liability franchise with efficient asset-liability management and maintenance of higher-than-required liquidity buffers. The Bank’s focus on the adoption of technology will improve its process efficiency, customer traction ability and operating costs, which would also drive incremental profitability.
NIMs (Net Interest Margin)consistently maintained and one of the highest: The Bank’s cost of deposit has been reduced from 6.04% in FY-15 to 5.03% in FY-19 registering a decline of 101 basis points in the past 4 years. The Bank has been able to retain its NIMs consistently above 4%. The NIMs are mostly stable at 4.3% for the past 4 years. The Bank enjoys one of the highest NIMs in the industry with proven track record of consistency in the past.
Loan AUM Mix:
Annual Report Analysis
The Bank has been closely working with the Government both at the Central and State levels primarily in areas of Digitisation. In an important development in the year ended March 31, 2019, the Bank has picked up a 9.11 percent stake in CSC e-Governance Services India Ltd for a cash consideration of Rs 14.6 crore. This is a company managed by Village Level Entrepreneurs (VLEs) & are access points for delivery of essential public utility services, social welfare schemes, healthcare, financial, education and agriculture services, apart from a host of B2C services to citizens in rural and remote areas of the country.
HDFC Bank will use this network to offer retail products and banking services to the citizens across the country and further contribute to the Government’s aim of digital India.
HDFC Bank is targeting a differentiated approach and approaching merchants with one-stop solutions (pilots gaining good traction). The Bank aims to ramp this up much faster than earlier –double merchant base.
The Indian economy remains a high growth achiever and various policy reform measures over the past couple of years (such as Goods and Service Tax 2017, Insolvency and Bankruptcy Code 2016 and Bank recapitalization plan 2017) will help improve India’s macro-economic stability considerably. On the back of various measures to address the issue of bad loans in the banking sector, the NPA cycle is now looking to be bottoming out. As per the RBI’s December 2018 Financial Stability Report, Gross Non-Performing Assets (GNPA) ratio of scheduled commercial banks declined from 11.5 per cent in March 2018 to 10.8 per cent in September 2018. The ratio is expected to have declined further to 10.3 per cent by March 2019. The Government along with the RBI has also taken several measures to infuse greater liquidity in the NBFC sector and plans to take measures to bring in stability in this sector. Encouragingly, investment revival remains on track in line with the trends in capacity utilization. The government’s focus on low-cost housing and other key infrastructure projects awarded through the roads and highway ministry seems to be having a favourable impact on the construction sector and the positive momentum is likely to continue.
Consistent slowdown in domestic consumption growth is one of the major challenges that the economy faces going into 2019-20.From the production side, the current slowdown is mainly on account of the agriculture sector (due to weak kharif season). On the demand side, the slowdown emanates from the consumption side. Going forward, one of the major risks to the economy remains sharp increases in oil prices, which could adversely affect inflation, fiscal deficit and the current account deficit. Risks on the external front continue to loom on account of a possible slowdown in the global economy, elevated protectionist tendencies.
|Net Interest Income||35230.00||42906.00||51448.00||61224.00||74108.00|
|Pre provisional operating profit||27357.00||35035.00||42700.00||50716.00||63804.00|
|Provisions & Contingencies||4833.00||6572.00||8382.00||10059.00||12070.00|
|Provision for Tax||7236.00||9903.00||11873.00||14270.00||18062.00|
|Profit after tax||15288.00||18560.00||22445.00||26387.00||33672.00|
|No of Shares||256.30||259.50||272.30||272.30||272.30|
The Bank’s best-in-class liability franchise, sustained investment in digital transformation, expansion of rural/small cities branches and improvement in productivity will ensure that the Bank delivers above-industry earnings growth. HDFC Bank is better placed in whole Private Sector Banks with consistent & prudent provisioning.
We initiate ‘Buy’ with a Target Price of INR 2,900 (23.5x EPS FY21E).