HDFC Systematix 02032009

7/31/2019 HDFC Systematix 02032009

1/36Mar 09 Systematix Research is also available on Bloomberg SSSL & Thomson Reuters SYSTEMATIX SHARES & STOCKS (I) L

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


2/36

Page 2 3/2/2009JKLHJKLHJated bySYSTEMATIX InstitutionalResearc

ar 09 Systematix Research is also available on Bloomberg SSSL & Thomson Reuters SYSTEMATIX SHARES & STOCKS (I) LTD

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)


3/36



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.


4/36



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


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..


5/36


6/36




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


7/36



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


8/36



Fig 9: HDFC Bank has the higher provision cover than ICICI Bank and Axis Bank


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



9/36



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


10/36



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


11/36



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


12/36



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


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




13/36



Table 8: Margins of the banks would show reverse trend now


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



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.


14/36



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


15/36



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


16/36


17/36



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.


18/36



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.


19/36



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


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.


20/36



Fig 19: NII & its growth


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



21/36



Fig 21: HDFC Bank: ROE&ROA



22/36



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


23/36



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


24/36


25/36



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.


26/36



Fig 26: Delinquencylevelsincreasingatfasterpaceinlinewiththeindustrywidetrend

Source: Company, Systematix Institutional ResearchFig 27: Although

asset

quality

deteriorating

still

it

is

better

than

peers

Source: Company


27/36



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


28/36



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


29/36



BALANCESHEET


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


30/36



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


31/36



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


32/36



PROFIT&LOSSSTATEMENT(NOTE:FY08FIGURESAREMERGERED)


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


33/36



BALANCESHEET(NOTE:FY08FIGURESAREMERGERED)


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


34/36



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


35/36



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


36/36


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

HDFC Systematix 02032009

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