Motilal Oswal Financial Services

29 June 2020

Annual Report Update | Sector: Financials

HDFC Bank

Buy

BSE SENSEX

34,962

S&P CNX

10,312

CMP: INR1,076 TP: INR1,250 (+17%)

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RoRWA expansion underscores inherently strong profitability

Higher ESOP grant to retain talent; CEO’s transition remains key event



Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

HDFCB IN

5,483

5909.7 / 76.7

1304 / 739

5/0/-1

12707

78.8



Financials Snapshot (INR b)

Y/E MARCH

FY20 FY21E

NII

561.9 657.9

487.5 565.1

262.6 271.9

NIM (%)

4.2

EPS (INR)

48.0

49.6

EPS Gr. (%)

21.2

3.2

BV/Sh. (INR)

311.8 351.8

ABV/Sh. (INR)

300.3 335.5

Ratios

RoE (%)

16.4

14.9

RoA (%)

1.9

1.7

Payout (%)

24.8

19.4

Valuations

P/E(X)

22.4

21.7

P/BV (X)

3.5

3.1

P/ABV (X)

3.6

3.2

Div. Yield (%)

1.1

0.9

FY22E

749.0

636.3

311.2

4.1

56.7

14.5

398.3

381.2

HDFCB’s Annual Report underscores structural improvement in the bank’s

profitability, driven by a 20bp increase in RoRWA, higher than a 7bp improvement

witnessed in RoA. For FY20, NII/PPoP grew by 17%/23% while PAT grew by 25% YoY

to INR263b with the bank reporting a RoE of 16.4%.

The bank has gained market share across multiple digital channels, with 17% market

share in POS terminals, ~8%/~29% share in debit/credit card spend, and a credit

card base of 14.5m (25.1% share). ~95% of transactions happen digitally, owing to

which the bank has shown continuous improvement in its cost ratios.

On the asset quality front, agri slippages stood elevated and segmental GNPA in the

priority sector increased to 4.3% v/s 1.3% for the bank. The bank further witnessed

a GNPA increase in the Services segment at 1.4% v/s 1.1% in FY19. Furthermore, the

concentration of the top four NPA accounts increased to ~10% v/s 6.5% in FY19.

In FY20, RWA density improved 560bp, driven by a reduction in risk weights on

personal loans (to 100% from 125%) and focused lending to better rated

corporate/retail customers. The concentration of the top 20 advances increased

100bp to 11.6% on higher growth in wholesale assets, and the concentration of the

top 20 depositors improved ~210bp to 4%.

We note that attrition among the top employees (salaries of >INR10m) has

increased over the past two years, with ~10% of such employees leaving the bank in

FY20 after an average of ~14 years of service. This remains a key monitorable as the

bank would also soon witness a CEO change.

We expect HDFCB to deliver strong business growth, led by improved digital

offerings. On the asset quality front, although slippages are likely to remain

elevated, impacted by COVID-19, strong provisioning buffers should limit the overall

impact on earnings. The CEO’s succession remains an important observable in the

near term. Maintain Buy, with TP of INR1,250 (3.0x FY22E ABV).

Strong focus on digitalization; operating leverage continues to surprise

positively

HDFCB has garnered major market share across multiple digital channels, with

17% market share in POS terminals, ~8%/~29% share in debit/credit card spends,

and a credit card base of 14.5m (25.1% share). ~95% of transactions happen

digitally, owing to which the bank has shown continuous improvement in its cost

15.1

ratios and business productivity. Thus, over the past five years, the C/I and cost-to-

1.6

asset ratios have improved by 592bp to 38.6% and 36bp to 2.0%, respectively. This

18.0

improvement came despite the addition of ~1400 branches and ~41k employees

over the similar period.

2.7

2.8

1.0

Improvement in RoRWA reflects adequate risk pricing

Over the long term, we note that besides a 44bp improvement in RoA over FY10–

20, RoRWA improved by ~56bp to ~2.6%. Furthermore, in FY20, RoRWA improved

by 20bp, much higher than a 7bp improvement reported in RoA. This indicates: a)

profitability has improved on the back of multiple levers (higher fee income and

lower opex) rather than simply on higher balance sheet risk and b) the bank has

been able to adequately price incremental risk on its unsecured book and earn a

higher return on the same.

Research Analyst: Nitin Aggarwal

(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |

Himanshu Taluja

(Himanshu.Taluja@motilaloswal.com)

Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com);

Yash Agarwal

(Yash.Agarwal@motilaloswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

HDFC Bank

Shareholding pattern (%)

As On

Mar-20 Dec-19 Mar-19

Promoter

21.2

21.3

21.4

DII

17.9

17.1

13.4

FII

48.6

49.6

50.5

Others

12.4

12.0

14.7

FII Includes depository receipts

Stock Performance (1-year)

RWA density improves 560bp; deposit concentration improves further

Over the past few years, RWA / Total Assets have stood higher for HDFCB v/s peers,

largely due to the bank’s high exposure to unsecured loans. However, in FY20, RWA

density improved 560bp, driven by a reduction in risk weights on unsecured

personal loans to 100% from 125% and focused lending to better rated

corporate/retail customers. The concentration of the top 20 advances increased

100bp to 11.6% on higher growth in wholesale assets, and the concentration of the

top 20 depositors improved ~210bp to 4%.

Attrition among top management remains high; upcoming CEO transition a

noteworthy event

We note that attrition among the top paid employees who earned salaries of more

than INR10m has increased over the past two years. ~10% of such employees who

had served the bank for an average of ~14 years left the organization in FY20. Of 19

such employees, three held positions of Group/Business Head. Thus, overall attrition

remains important given that the bank is witnessing the exit of a CEO who has been

at the helm for ~25 years.

Agri NPAs stay elevated; concentration of top four NPAs increases to ~10%

The bank has witnessed a spike in its agri slippages over the past few years, which

has kept overall slippages higher. Thus, agri GNPA stood higher at 3.4% in FY20

(average of 3.5% over FY18–20), while overall GNPA was controlled. The bank also

witnessed a spike in the Services segment, with GNPA at 1.4% v/s 1.1% in FY19.

Furthermore, the concentration of the top four NPA accounts increased to ~10% v/s

6.5% in FY19. However, the bank has strengthened its balance sheet with a strong

PCR at ~72%; along with a high provisioning buffer, this should keep credit cost in

check.

Subsidiaries: HDB’s performance takes a breather; Securities business gains

momentum



HDFCB Financials:

Affected by the ongoing NBFC crisis and COVID-19 outbreak,

the performance of HDB Financials was impacted in FY20, with AUM growth

moderating to 6% v/s an average of ~30% over the past five years. On the other

hand, PAT reported decline of ~13% YoY to INR10b. Asset quality deteriorated

with an increase in GNPA/NNPA to 3.9%/3.2% in FY20 v/s 1.8%/1.3% in FY19.

Near-term performance is likely to remain muted given the challenging macro

environment, while asset quality may continue to remain under pressure as

stage 2 assets have increased ~64% YoY.

HDFC Securities:

The performance of HDFC Securities picked up with revenue

and PAT posting healthy 12% YoY and 16% YoY growth to INR8.6b (revenues

declined in FY19) and INR3.8b, respectively. The company has a customer base

of 2.4m with ~0.8m transacting customers, the third highest among broking

houses; moreover, customers accessing the services digitally increased to 79%

v/s 68% in FY19. Owing to improved operating leverage, steady growth in new

customers, and better market conditions, we expect the company to report a

strong earnings trend over the next few years and gain momentum.

29 June 2020

HDFC Bank

Valuation and view

HDFCB has delivered strong growth despite economic activity being impacted due to

the COVID-19 outbreak. Moderation in retail credit due to consumption slowdown is

being compensated well by the Wholesale segment, which is driving overall loan

growth. On the asset quality front, slippages are likely to remain elevated due to the

COVID-19 disruption, which could keep credit cost higher; however, higher

provisioning buffers should limit the overall impact on earnings. Furthermore, a

strong liability franchise would support margins, while higher liquidity levels would

enable the bank to ride the current crisis and gain higher market share. We estimate

the loan book / PAT to grow at a CAGR of 16%/9% over FY20–22. The CEO’s

succession, though, remains an important event in the near term. Maintain Buy,

with TP of INR1,250 (3.0x FY22E ABV).

Exhibit 1: SOTP-based pricing

HDFC Bank

HDB Financial Services

HDFC Securities

Total Value of Subs

Less: 20% holding Disc

Value of Subs (Post Holding Disc)

Target Price

Stake (%)

97.3

95.5

Total Value

INR b

6,340.0

524.2

117.5

641.7

128.3

513.3

6,853.4

Total Value

USD b

89.1

7.4

1.7

9.0

1.8

7.2

96.3

Value Per

Share INR

1,156

117

1,250

% of Total

Value

92.5

7.6

1.7

9.4

1.9

7.5

Rationale

3.0x FY22E ABV

4.5x FY22E Net worth

22x FY22E PAT

29 June 2020

HDFC Bank

Renewed focus on semi-urban and rural lending

Wholesale Banking: The key growth engine in FY20



HDFCB has delivered a loan book CAGR of 22% over the past five years,

significantly ahead of systemic loan growth, which has resulted in significant

market share gains. HDFCB witnessed 21% YoY growth in FY20, with the market

share expanding ~120bp to 9.6%. HDFCB has an industry-leading position in

almost every aspect of retail banking, primarily attributed to its technology

adoption.

Renewed focus on driving rural and semi-urban lending would aid business

growth, with ~50% of branches having footprint in semi-urban and rural

locations. Furthermore, SME loans have also witnessed a boost with the

digitization of the application process, which has reduced the turnaround time

(TAT).

Growth in the Retail segment has moderated, reflecting slowdown in

consumption. While the share of unsecured personal and credit card loans has

increased over the past few years, the bank’s credit monitoring framework

remains robust, helping it maintain strong control on delinquencies. The bank

has 50%+ market share in the Credit Card business and aims to double its

outstanding card base over the next three years.

HDFCB has built a Wholesale business by offering the entire range of banking

support, such as Payments, Tax Solutions, Government Business, Trade Finance

Services, and Cash Management Solutions. This has resulted in a pickup in the

wholesale book, which has compensated well for the moderation witnessed in

retail loan growth. Overall, the bank reported 21% YoY growth in advances, led

by 29% YoY growth in wholesale advances; conversely, retail loan growth

moderated to ~15% YoY.

Retail Banking



Auto:

HDFCB continues to lead in Auto loans, with a strong presence in

Passenger, CV, and 2W financing. The Auto loan market has de-grown by ~15%

over the last two years; nevertheless, HDFCB was able to report a ~6% CAGR

during this period, led by new customer acquisitions in the interiors of the

country.

Personal Loans:

The portfolio reflected a strong growth trend at a 29% CAGR

over the last decade, surpassing the milestone of INR1t to reach INR1.16t. ~80%

of loans were to employees of top-rated corporates with reasonably high

disposable incomes.

Credit Cards:

The bank is the largest credit card issuer in the country, with a

card base of 14.5m, and forms ~6% of the overall portfolio. The bank has also

issued co-branded cards to tap new markets and expand its presence in existing

markets. The co-branded card with IOC helps expand its reach in the semi-urban

and rural locations, the co-branded card with Indigo covers the huge Aviation

market, while the one with Walmart helps cater to the SME segment.

Home Loans:

In FY20, the bank originated INR23.5b worth of home loans every

month (~INR280b during the year), while purchasing INR242b from HDFC Ltd as

direct assignment of loans.

29 June 2020

HDFC Bank

Wholesale Banking

Wholesale Banking was the key growth engine in FY20 with ~29% YoY growth and

compensated well for the moderation in retail loan growth. The segment focuses on

institutional customers, such as the Governments, Large and Emerging Corporates,

and SMEs; it has offerings such as working capital and term loans; supply chain

financing; and trade credit, cash management, foreign exchange, and investment

banking services.



Corporate Banking,

which focuses on large, well-rated companies, continues to

be the biggest contributor to Wholesale Banking. The business was able to

capitalize on the trend of large companies preferring to deal with fewer banks.

The bank has deepened its existing relationships as well as gained market share

by leveraging its wide product offerings, and has a total loan portfolio of INR2.4t

(+57% YoY).



Emerging Corporates Group,

which focuses on the mid-market segment, also

witnessed strong traction. It continues to have a diversified portfolio, with a

presence in more than 50 cities in India.



Government Business

has helped

the bank sustain its focus on tax collections;

the segment collected direct tax of over INR3t and indirect tax of INR39.2b in

FY20 as well as GST of INR1.8t.

Agriculture and MSME



Agri:

Bank credit to Agriculture & Allied activities stood at INR1.46t (+14% YoY).

The key to the bank’s success in this market has been its ability to tap the

opportunities through: a) a wide product range b) quicker turnaround time, and

c) digital solutions.



The bank has covered ~125k villages under the Kisan Gold Card for farm loans,

460k rural customers’ needs have been met under the ‘Har Gaon Hamara’

program, and ~1.2m Kisan Dhan Vikas Kendra accounts were set up; the bank

aims to cover ~0.8m dairy farmers under the ‘Milk-to-Money’ program over the

next two to three years.



Furthermore, HDFCB is working toward building a digital capability that would

sanction working capital loans to MSMEs based on deep technology integration

and AI-led credit risk modeling.



The bank has launched a new digital payment solution

‘SmartHub’,

specially

designed for self-employed and small businesses, enabling the customer to

instantly open an account and become a merchant.



Advances to the MSME segment stood at INR1.6t (+23% YoY), with loans to

micro-enterprises at INR664b.

29 June 2020

HDFC Bank

Exhibit 2: Loan growth at 21% YoY for FY20

Loans (INRt)

27%

21%

19%

24%

YoY growth (%)

21%

15%

Exhibit 3: HDFC’s loan market share (%) expands ~120bp

HDFC Bank Loan Market share (%)

17%

3.7

4.6

5.5

6.6

8.2

9.9

11.4

13.4

Source: MOFSL, Company

Exhibit 4: Loan mix remains well-balanced

Retail loans (%)

Wholesale loans (%)

Exhibit 5: Loan growth CAGR across segments

CAGR growth (FY10-FY20) (%)

29%

31%

19%

22%

23%

53%

52%

49%

45%

47%

50%

17%

47%

48%

51%

55%

53%

50%

Source: MOFSL, Company

Strong funding profile; deposit market share improves further

HDFCB continues to see strong growth in deposits, further aided by a shift in

depositors’ confidence toward large banks from small and medium banks; as a

result, the bank reported growth of 24% YoY (+7.5% QoQ) in 4QFY20. Overall, the

bank has witnessed robust growth at a 21% CAGR over the past decade, which has

helped the bank maintain a robust liability franchise. The bank saw market share

gains of ~120bp to 8.5% in FY20. Growth in deposits was led by growth in both term

deposits and CASA deposits by 24.6% YoY and 23.9% YoY, respectively. Overall, the

bank’s CASA ratio stood at 42.2% (+270bp QoQ).

Exhibit 6: Deposit traction remains robust at 21% CAGR over

past decade (+24% YoY in FY20)…

Deposits (INRt)

YoY growth (%)

Exhibit 7: …resulting consistent market share gains to 8.5%

in FY20 (+120bp in FY20) from ~3.7% in FY10

HDFC Bank Deposit Market share (%)

Source: MOFSL, Company

29 June 2020

HDFC Bank

Exhibit 8: CASA ratio remains strong at 42.2%

CASA ratio (%)

48.0

44.0

43.5

56.2%

45.1%

42.2%

41.0%

45.2%

38.8%

Exhibit 9: CASA ratio across peers

CASA ratio (%)

43.2

42.4

42.2

Source: MOFSL, Company

Margins to witness some pressure; reduction in SA/TD rates to offset

some impact



HDFCB has lowered its SA

rate to 3.25% and reduced

its TD rates by ~190bp



With credit demand negligible during the lockdown and surplus liquidity

available in the system, banks have been carrying excess liquidity in their

balance sheets to ride out the crisis. However, this excess liquidity is likely to put

pressure on the margin trajectory.

Moreover, a sharp reduction in the repo rate announced by the RBI has resulted

in moderation in yield under externally benchmark-based price regime loans

and the MCLR cut announced by the banks. HDFCB has reduced its one-year

MCLR to 7.65% (50bp cut since Mar’20).

However, HDFCB has also lowered its SA rate to 3.25%. The bank has further

lowered its peak term deposit (TD) rate by 190bp to 5.5%. We believe this

reduction in SA/TD rates would support some amount of margin pressure.

Overall, we expect HDFCB to face margin pressure, but a strong liability

franchise would help offset this to a certain extent.

Exhibit 10: One-year MCLR rate across banks

One-year MCLR rate (%)

BOB

PNB

SBIN

AXSB

HDFCB

ICICIBC

KMB

Repo Rate

Feb'19

8.75%

8.55%

8.90%

8.75%

8.80%

9.05%

6.25%

Jun'19

8.70%

8.45%

8.70%

8.75%

8.90%

5.75%

Aug'19

8.45%

8.30%

8.25%

8.55%

8.60%

8.65%

8.75%

5.40%

Sep'19

8.40%

8.30%

8.15%

8.45%

8.55%

8.75%

5.40%

Nov'19

8.30%

8.15%

8.00%

8.25%

8.30%

8.35%

8.50%

5.15%

Apr'20

8.00%

7.75%

7.40%

7.95%

8.00%

8.10%

4.40%

May'20

7.80%

7.75%

7.25%

7.80%

7.70%

7.75%

7.90%

4.00%

June'20

7.65%

7.60%

7.00%

7.75%

7.65%

7.70%

7.75%

4.00%

Change

(bps)

-150

-125

-150

-170

-190

-200

-205

-225

Source: MOFSL, Company website

Exhibit 11: SA rates across banks, along with CASA mix

SA rate (%)

AXSB

HDFCB

ICICIBC

BOB*

SBIN

Old

3.25%

3.50%

3.25%

2.75%

Revised

3.00%

3.25%

3.00%

3.25%

2.70%

CA Mix

14.1%

15.2%

13.3%

6.1%

7.0%

SA Mix CASA Mix

27.1%

41.0%

27.0%

42.2%

31.9%

45.1%

32.7%

38.8%

38.2%

45.2%

Source: Banks, MOFSL

Exhibit 12: TD rates across tenures: Short-tenure TD rates in

2.9–3.5% range, well below repo rate

TD rates

(%)

HDFCB

AXSB

ICICIBC

SBIN

BOB

7–14

days

3.0%

3.3%

2.9%

3.3%

0–3

months

4.5%

4.3%

3.9%

4.3%

3–9

months

5.0%

4.8%

4.4%

4.9%

9–15

months

5.6%

5.8%

5.6%

5.1%

5.6%

15–36

months

5.8%

5.1%

5.6%

*CA, SA and CASA mix as on 3QFY20

Source: Banks, MOFSL

29 June 2020

HDFC Bank

Exhibit 13: One- to three-year peak TD rates across banks

Peak deposit rate (%)

BOB

PNB

SBIN

AXSB

HDFCB

ICICIBC

KMB

Repo Rate

Mar'19

6.80%

6.75%

6.80%

7.50%

7.40%

7.50%

7.30%

6.25%

Jun'19

6.80%

6.75%

6.80%

7.50%

7.40%

7.50%

7.30%

5.75%

Aug'19

6.70%

6.75%

6.70%

7.20%

7.30%

7.10%

6.90%

5.40%

Sep'19

6.60%

6.70%

7.00%

6.80%

5.40%

Nov'19

6.40%

6.25%

6.85%

6.50%

5.15%

Apr'20

5.70%

5.80%

5.70%

6.10%

6.00%

5.80%

4.40%

May'20

5.70%

5.75%

5.30%

5.80%

5.75%

5.25%

4.00%

June'20

5.30%

5.50%

5.30%

5.80%

5.50%

5.25%

4.00%

Change

(bps)

-150

-125

-150

-170

-190

-200

-205

-225

Source: MOFSL, Company website

Component-wise breakup of earnings/spend by bank

Exhibit 14: Split of INR earnings

1.7%1.6%

1.7%

11.8%

Interest from

Advances

Interest from

Investments

Comm, Exch,

Brokerage

Other Interest

Income

Other Income

FX & Derivative

Income

Source: MOFSL, Company

Exhibit 15: Split of INR spend

5.0%

Interest Expenses

Operating Expenses

45.2%

9.4%

Provisions

Trasfer to Reserve

Tax

23.7%

Dividend Paid & Tax

Source: MOFSL, Company

8.0%

8.7%

16.7%

66.5%

Segmental profitability remains well-balanced; Retail PBT contributes 34%

Among segments, Retail PBT grew ~10% YoY and contributed ~34% to total profits;

this was despite revenue growth coming in at ~21% YoY owing to the bank creating

higher provisions, particularly toward the Unsecured Retail and Agri segments.

Wholesale revenue growth moderated to 12% YoY, resulting in flattish PBT. The

contribution of Wholesale PBT declined to 37% in FY20 from 43% in FY17. In the

Treasury segment, revenue grew by 13% YoY, and profitability increased ~3x to

INR35b, contributing ~9% of total profits. Profitability from other banking operations

improved by 15% YoY and contributed ~20% to total segmental profits.

Exhibit 16: Segmental trends across business segments – Retail reflects improving trends

INR b

Retail

YoY growth (%)

Wholesale

YoY growth (%)

Treasury

YoY growth (%)

Other Operations

YoY growth (%)

FY17

2,958

2,721

2,634

272

Assets

FY18

FY19

3,719

4,288

26%

15%

2,970

4,087

38%

3,509

3,488

33%

-1%

376

509

38%

35%

FY20

4,843

13%

5,206

27%

4,572

31%

605

19%

FY17

661

326

203

Revenue

FY18

FY19

738

892

12%

21%

415

546

27%

31%

198

236

-2%

19%

123

153

36%

25%

FY20

1,080

21%

611

12%

266

13%

190

24%

FY17

101

PBT

FY18

100

18%

117

16%

-7%

63%

FY19

118

18%

142

21%

-15%

24%

FY20

129

10%

141

-1%

165%

15%

Source: MOFSL, Company

29 June 2020

HDFC Bank

Agri slippages pressured, but high provisioning buffer

provides comfort

Improvement in RoRWA underscores adequate risk pricing



Accounts where the asset

classification benefit has

been availed stand at

INR10.8b, on which the

bank carries a PCR of ~43%



Over the past few years, HDFCB’s retail loan mix has evolved in favor of

unsecured products, with robust growth in the Credit Cards portfolio and

unsecured personal loans to ~35% currently from ~18% of the retail book in

FY14. However, growth in the Unsecured Credit Card and Personal Loans

segments does not have a linear correlation with the bank’s risk profile, in our

view. This is due to a significant portion of credit cards and personal loans being

sold to existing customers post the appraisal of their credit history, which has

enabled the bank to maintain control over its delinquencies.

However, the bank has witnessed a surge in agri slippages over the past few

years, which has kept overall slippages higher. We note that Agri GNPA for the

priority sector stood higher at 4.3% in FY20 (average of 4.0% over FY18–20),

while overall GNPA stood at controlled levels. Overall, the GNPA ratio declined

to 1.26% in FY20 v/s 1.36 in FY19, while slippages stood stable at 1.9%

(INR175.6b). In FY20, the bank raised its PCR to 72%, resulting in ~21% decline in

NPA. The NNPL ratio, thus, improved to ~0.36%.

Moratorium update:

Accounts for which the asset classification benefit has

been availed stand at INR10.8b (term loans: INR6.2b; overdraft: INR4.6b), on

which the bank holds a provision of INR4.6b (~43%).

We believe the COVID-19 outbreak could keep asset quality under pressure,

impacted by the Agri and Unsecured Retail segments. We thus expect credit cost

to remain elevated, while provisioning buffers should limit the overall impact on

earnings. We expect overall estimated credit cost to remain at 1.4–1.5% over

FY20–22.

Exhibit 17: Bank witnesses spike in agri slippages, resulting in higher GNPA in Agri segment

(priority sector)

Overall GNPA (%)

Agri GNPA (%)

4.3

3.4

1.4

0.9

2.0

4.3

1.3

0.9

1.1

1.3

1.4

1.3

Source: Company, MOFSL

29 June 2020

HDFC Bank

Exhibit 18: Coverage ratio improves by ~300bp over past

three years to ~72%

GNPA ratio (%)

NNPA ratio (%)

PCR (%)

0.6%

Exhibit 19: Cash recoveries and upgrades have been stable,

resulting in stable GNPA ratio

Cash recoveries/upgrades (INRb)

1.1%

0.9%

0.8%

As % of loans

32.5

69.7

71.8

78.8

Source: Company, MOFSL

Exhibit 20: Slippage ratio remains stable at ~1.9%, while

credit cost increases marginally to ~1%

Slippage Ratio (%)

2.1

1.6

0.5

1.6

0.5

1.5

0.6

0.8

Credit cost (%)

2.7

1.9

0.9

1.9

1.0

1.5

2.5

1.4

Exhibit 21: Slippage ratio remains lowest among large banks

Slippage ratio (%)

3.7%

1.9%

2.4%

1.6%

2.2%

Source: Company, MOFSL



Source: Company, MOFSL

We note that, over the long term, besides improvement witnessed in RoA (44bp

over FY10–20), the bank’s RoRWA increased by ~56bp to ~2.6% during this

period. Furthermore, RoRWA improved by 20bp in FY20, much higher than a

mere 7bp improvement seen in RoA. This indicates that: a)

profitability has

improved on the back of multiple levers

(higher fee income and lower opex)

rather than simply on higher balance sheet risk and b)

the bank is able to

adequately price incremental risk

in the unsecured portfolio and earn a higher

return on the same.

Exhibit 23: RoRWA increases by 20bp in FY20 v/s mere 7bp

increase in RoA

3.0

2.5

22.5

2.0

1.5

1.0

RoRWA

RoA

Exhibit 22: Recoveries from write-offs trend higher and

stand at INR22.5b in FY20

Recovery from W. Off a/c's (INRb)

8.6

10.9

14.3

Source: Company, MOFSL

29 June 2020

HDFC Bank

Share of ‘Sub-Standard’ NPLs increases; concentration of top four NPA

accounts rises to ~10%



The mix of Sub-Standard

assets increased to ~64%

v/s ~56% in FY19



The proportion of Sub-Standard assets increased to 64% in FY20 from 56% in

FY19, while the mix of Loss and D-3 assets combined declined to ~11% v/s ~15%

in FY18. Although this reflects the requirement of higher aging provisions, it

could be offset by the higher standard asset/contingent provisions carried by

the bank as of FY20.

Furthermore, the concentration of the top four NPA accounts increased sharply

to ~10% v/s 6.5% in FY19, after three years of consecutive decline. Moreover,

GNPAs in the priority sector increased by ~10bp, led by a 26bp increase in the

Services sector and 17bp increase in personal loans. However, GNPA in the non-

priority sector improved by 14bp, led by an increase in the Agri segment by

~180bp to 0.3% in FY20 v/s 2.1% in FY19.

Exhibit 24:

Higher proportion of Sub-Standard assets reflects

higher aging provision requirement; could be offset by

higher standard asset/contingent provisions

Sub Standard

14%

11%

16%

50%

12%

15%

14%

16%

11%

12%

14%

Loss

10%

12%

17%

15%

Exhibit 25:

Concentration of top four NPA A/Cs increases

sharply to ~10% of gross NPA v/s 6.5% in FY19

11.3%

Top 4 NPA (INRb)

10.0%

8.2%

Top 4 NPA/GNPA

10.1%

6.5%

59%

58%

59%

56%

64%

5.0

5.9

7.1

7.3

12.7

FY15

FY16

FY17

FY18

FY19

FY20

Source: Company, MOFSL

Exhibit 26: GNPAs in priority sector witness increase, led by Services/Personal segment; GNPA in non-priority sector improves

on improvement in Agri segment

INR b

Priority Sector

Agriculture

Industry

Services

Personal loans

Total (A)

Non-Priority Sector

Agriculture

Industry

Services

Personal loans

Total (B)

Total (A+B)

FY17

O/s advances GNPA (%)

632

262

524

224

1,641

1,274

1,279

1,322

3,945

5,586

2.0%

1.8%

1.3%

0.1%

1.5%

1.1%

1.0%

0.8%

0.9%

1.0%

FY18

O/s advances GNPA (%)

735

284

530

205

1,754

141

1,411

1,558

1,777

4,888

6,643

3.4%

1.7%

1.9%

0.1%

2.3%

1.1%

1.3%

0.7%

0.8%

0.9%

1.3%

FY19

O/s advances GNPA (%)

743

336

833

296

2,207

2,015

1,834

2,132

6,067

8,273

4.3%

0.9%

1.5%

0.1%

2.1%

1.1%

1.0%

1.1%

1.4%

FY20

O/s advances GNPA (%)

823

433

1,005

322

2,583

231

2,746

1,901

2,566

7,444

10,027

4.3%

0.9%

1.7%

0.3%

2.2%

0.3%

1.0%

1.2%

0.7%

0.9%

1.3%

Source: Company, MOFSL,



Higher provisioning buffer provides comfort:

The bank held a floating provision

of ~INR14.5b and had a total standard assets provision of INR44.4b as of FY20.

Furthermore, the bank had a contingent provision of INR30b.

Additionally, the

29 June 2020

HDFC Bank



SR book stood at INR4.4b in FY20, with the bank carrying a contingent

provision of INR1.9b toward the same.

Sensitive sector exposure:

Commercial Real Estate exposure for the bank stands

at INR423b in FY20 v/s INR351b in FY19, and corresponds to ~4.3% of total

loans; exposure toward the capital markets declined to INR190b.

RWA density improves 560bp; deposit concentration improves to 4%

In FY20, HDFCB had a Tier-1 ratio of 17.2% (CET 1 of 16.4%), while the total CAR

stood at 18.5%. The bank’s focused lending to better rated corporates and retail

customers resulted in an improvement in RWA density by ~560bp to ~69% v/s ~75%

in FY19. Furthermore, the concentration of the top 20 advances/exposures

increased by 100bp/90bp to 11.6%/12.0% during the year. On the liability side, the

concentration of the top 20 depositors improved ~210bp to 4.0%.

Exhibit 27: Concentration of top 20 advances/exposures

increases, while that of deposits declines to ~4%

Top 20 Adv

20.0%

15.0%

10.0%

5.0%

0.0%

Top 20 Exposure

Top 20 Dep

Exhibit 28: RWA density improves to ~69% after witnessing

stable trend at ~75% over past few years

76.4%

RWA to total assets (%)

79.1%

75.2%

74.1%

70.2%

71.6%

69.3%

74.9%

Source: MOFSL, Company

Building strong digital prowess; market share improves across products

Market share is 17% in POS

terminals, 25.1% in credit

cards, and 3.9% in debit

cards



The bank has initiated Digital 2.0 with a focus on re-imagining its digital

platforms, providing the customer with a frictionless financial experience. The

objective is to move the customer from a single transaction to a complete

financial solutions journey, thereby meeting all their financial needs. Be it under

the Pay, Save, Invest, Borrow, Shop, Trade, Insure, or Advice category, the bank

offers the whole range of its financial experience on a platform / at a place of

the customer’s choice.

HDFCB has garnered major market share across multiple digital channels, such

17% market share in POS terminals,

with nearly 1.8m merchant acceptance

points across the country;

7.9% in debit card spend, with a total of 32.1m debit

cards (3.9%); and 28.8% in credit card spend, with a total of 14.5m credit cards

(25.1%).

The bank has launched a fully digital account opening process, through which a

new customer can open an account within just a few minutes. The asset and

card customers’ journeys are also being re-imagined, and the bank aims to make

them more contextual, real-time, predictive, and frictionless.

The banks provides the widest range of solutions to the central and state

governments across departments, such as transit (metro, bus, waterways, etc.),

tolls (national and state highways), FASTag, government disbursals, and

29 June 2020

HDFC Bank



payments (subsidies, direct benefit transfers, eNam, etc.). The bank is also

providing end-to-end digital transaction solutions in smart cities. It has recently

been awarded the coveted Pune Metro project.

APIs allow for the seamless and secure exchange of information between bank

systems and others. This enables the bank to make its products and services

available outside of its platforms to all its merchants and on platforms that

customers prefer (ecommerce sites, messaging apps, modern trade POS, etc.).

The bank is developing numerous APIs to cater to the entire spectrum of its

customers' financial needs, i.e., Pay, Save, Borrow, Invest, Insure, and Shop. APIs

for card issuances were launched to expand the market with new partnerships

for open-market customer sourcing. The bank’s API stack is best-in-class and

contains real-time credit and verification algorithms to provide an instant soft-

approval to an open-market customer.

Key digital innovations



My Account My Choice:

CASA customers can now choose any account number

of their choice during opening an account; ~66k+ accounts were activated with a

book balance of over INR50b.

Card-less cash withdrawal:

Customers can withdraw cash from HDFC Bank

ATMs without an ATM card; ~65m withdrawals were registered through 21k+

transactions.

WhatsApp banking:

HDFC Bank has an official account on WhatsApp for

customer servicing, banking, acquisition, and communication. ~6.4m requests

were served and have an active user base of ~1m.

Exhibit 30: Market share in credit card spend

FY19

26.5

17.6

14.1

12.7

3.6

FY20

25.1

18.3

15.8

12.1

4.6

Market Share (%)

HDFCB

SBIN

ICICIBC

AXSB

RBL

FY15

30.0

11.1

11.2

7.1

0.3

FY16

30.6

12.0

10.9

7.5

0.4

FY17

29.4

13.2

10.9

8.7

0.9

FY18

28.6

16.6

11.1

9.6

1.5

FY19 FY20

28.0 28.8

17.1 17.8

11.1 12.2

10.2 10.4

2.7

4.0

FY17

28.6

15.3

14.3

11.2

0.9

FY18

28.5

16.7

13.3

12.0

2.1

Exhibit 29: Market share in o/s credit cards

Market Share (%)

HDFCB

SBIN

ICICIBC

AXSB

RBL

FY15

28.3

15.0

15.8

8.2

0.4

FY16

29.7

14.8

14.9

9.8

0.6

Source: MOFSL, Company

Exhibit 31: Market share in o/s debit cards

Market Share (%)

SBIN

BOB

ICICIBC

BOI

HDFCB

FY15

29.0

4.6

5.0

4.9

3.9

FY16

28.6

4.9

5.3

3.5

FY17

33.3

5.1

4.3

5.5

2.8

FY18

32.3

6.0

4.8

6.2

2.8

FY19

34.2

6.6

4.8

6.5

2.9

FY20

33.6

6.5

5.6

4.8

3.9

Exhibit 32: Market share in debit card spend

Market Share (%)

SBIN

HDFCB

ICICIBC

AXSB

BOB

FY15

31.8

8.4

9.1

6.4

2.9

FY16

31.5

8.3

8.4

5.8

3.1

FY17

31.0

8.1

7.8

5.5

3.1

FY18

39.8

7.3

7.0

5.0

3.0

FY19

37.5

7.6

6.9

5.2

3.1

FY20

35.5

7.9

7.5

5.7

4.5

Source: MOFSL, Company

Exhibit 33: Market share in POS terminals

POS – Market Share (%)

RBK

SBI Cards

AXSB

HDFCB

ICICIBC

KMB

FY15

0.0%

17.8%

22.1%

21.7%

19.7%

0.0%

FY16

0.1%

21.8%

19.0%

20.4%

14.5%

0.0%

FY17

3.2%

20.1%

17.1%

17.0%

12.1%

0.0%

FY18

13.1%

20.2%

16.0%

12.9%

10.4%

0.2%

FY19

18.6%

15.5%

13.6%

13.2%

10.5%

0.7%

FY20

25.5%

13.1%

10.2%

17.0%

9.4%

0.7%

Source: MOFSL, Company

29 June 2020

HDFC Bank

Operating leverage continues to improve

Digitization has helped reduce sourcing cost



HDFCB has reported steady improvement in operating costs, which has enabled

it to maintain healthy earnings growth. Over the past five years, the C/I and

cost-to-asset ratios have thus improved by 592bp and 36bp to current levels of

38.6% and 2.0%, respectively. This improvement has come despite the addition

of ~1400 branches and ~41k employees over the similar period.

HDFCB’s opex strategy is centered on: a) increasing operating efficiency, b) the

efficient use of digital technology, thereby increasing customer convenience and

ease, and c) competing against disruptive technology.

Process automation has helped reduce sourcing costs:

HDFCB pioneered the

concept of online personal loans and has been witnessing strong traction in 10-

Second Personal Loans, Digital Loan against Shares, and Loan against Mutual

Funds, and continues to drive value through its digital platforms, increasing

penetration in its internal customer base. ~95.1% of transactions happen

digitally, enabling the bank to reduce cost materially.

Thus, we expect continued improvement in operating leverage as: a)

employee/branch growth remains controlled, b) branch productivity improves

further, and, most importantly, c) the use of technology further drives down

expenses. The bank has further guided for an improvement of ~500bp in its C/I

ratio over the next five years.

Exhibit 35: …despite banks continuing to add employees and

branches

No of Employees

Branches

Exhibit 34: Cost ratios witness significant improvement of

600bp over past five years…

C/I ratio (%)

Cost/Assets (%)

Source: Company, MOFSL

Business productivity improves; SA per branch rises to INR573m in FY20 v/s

INR487m in FY19

HDFCB has been focusing on improving branch productivity by leveraging

technology. HDFCB’s business per branch improved to INR3.9b in FY20 from INR3.0b

in FY18; business per employee also bettered to INR183m in FY20 from INR164m in

FY18. Furthermore, SA per branch of HDFCB improved to INR573m in FY20 v/s

INR487m in FY19, indicating higher productivity and operational efficiency at the

branch level. With ~52% of its branches concentrated in the semi-urban and urban

regions, HDFCB has been able to improve its business productivity.

29 June 2020

HDFC Bank

Exhibit 36: Business/branch consistently improves to

INR3.9b per branch

Branches

Business/Branch (RHS, INRm)

Exhibit 37: Business/employee improves to INR183m v/s

INR98m in FY14

Employees

Business/Emp (RHS, INRm)

142

164

178 183

107 115

Source: Company, MOFSL

Exhibit 38: CASA/branch reflects improving trend…

CASA / Branch (INRm)

Exhibit 39: …and SA/branch also improves considerably

SA / Branch (INRm)

Source: Company, MOFSL

Exhibit 40: Region-wise split of branches: 52% of branches in rural and semi-urban

28%

Rural

21%

Semi-Urban

Urban

Metro

20%

31%

International

Source: Company, MOFSL

29 June 2020

HDFC Bank

Subs: HDB’s performance takes a breather; Securities

business gains momentum

HDB Financials – Business performance remains weak; asset quality comes

under pressure

HDB PAT grew at a CAGR of

24% over FY15–20

HDB Financials had total AUM of INR588b as of FY20 and was delivering healthy

return ratios up to FY19. However, performance was impacted in FY20 due to the

ongoing NBFC crisis and COVID-19 outbreak. AUM growth moderated to 6% in FY20

v/s an average of ~30% over the past five years, while PAT registered decline of

~13% YoY to INR10b. NII grew ~23% YoY to INR41.5b. The company witnessed

deterioration in asset quality, resulting in an increase in GNPA/NNPA to 3.9%/3.2%

in FY20 v/s 1.8%/1.3% in FY19. For FY20, the company reported RoA/RoE of

1.7%/13.2%. Although HDB Financial remains well-capitalized with Tier I/CAR of

14.0%/19.4%, near-term performance is likely to remain muted given the

challenging macro environment, while asset quality may continue to remain under

pressure, impacting return ratios.

Exhibit 42: …while PAT registers decline of 13% YoY

67%

53% PAT (INRb)

28%

36%

YoY growth (%)

24%

10.0

-13%

Exhibit 41: AUM growth moderates sharply to 6% YoY…

AUM (INRb)

42%

34%

30%

31%

25%

588

YoY growth (%)

3.5

5.3

6.8

9.3

11.5

193

259

338

443

554

Source: MOFSL, Company

Exhibit 43: Return ratios suppressed in FY20…

RoA (%)

16.7

2.1

1.6

12.5

1.9

16.0

2.4

2.3

15.6

RoE (%)

2.3

16.6

17.4

Exhibit 44: …as asset quality deteriorates in FY20

GNPA (%)

NNPA (%)

3.9

2.3

1.7

13.2

0.8

1.2

0.5

1.5

0.7

1.6

0.8

1.0

3.2

14.7

1.8

1.3

Source: MOFSL, Company

29 June 2020

HDFC Bank

Exhibit 45: Capitalization level remains strong, with total CAR at 19.4%

15.5

11.4

7.0

7.5

Tier-I

15.3

Tier-II

13.2

12.8

14.0

13.4

5.8

5.5

4.7

5.1

5.4

Source: MOFSL , Company

HDFC Securities – Business performance modest; gaining swift momentum

PAT grew at a CAGR of 18%

over FY15–20

HDFC Securities has grown its revenue/PAT at 16%/18% CAGR over FY15–20.

Revenue/Earnings growth has picked up over the past few years, aided by rising

share of financial savings and the increasing formalization of the economy. HDFC

Securities expanded its presence to 262 branches across 161 cities in FY20 from 194

branches in 150 cities in FY13. The company, after reporting negative growth in

FY19, showed a 12% YoY growth in FY20 to INR8.6b. Conversely, PAT grew by 16%

YoY to INR3.8b. RoE expanded to ~32% v/s 22% in FY16. The company has a

customer base of 2.4m, with ~0.8m transacting customers, the third highest among

broking houses. The focus on digitization continued, with customers accessing

services digitally increasing to 79% v/s 68% in FY19. For the mobile app, this

increased to 50% v/s 37%. Owing to improved operating leverage, steady growth in

new customers, and better market conditions, we expect the company to report a

strong earnings trend over the next few years and gain momentum.

Exhibit 47: … while PAT growth was healthy at 16% YoY

PAT (INRb)

110%

62%

12%

5.5

8.0

-4%

-19%

8.6

1.6

1.3

2.2

3.4

60%

16%

-4%

3.3

3.8

YoY growth (%)

Exhibit 46: Total income grew 12% YoY in FY20…

Total Revenues (INRb)

58%

38%

4.0

4.2

-4%

45%

YoY growth (%)

7.7

Source: MOFSL, Company

29 June 2020

HDFC Bank

Exhibit 48: Return ratios remain strong for HDFC Securities, with RoE at ~32% for FY20

RoA (%)

18.3

11.2

13.3

32.6

19.3

21.6

17.5

RoE (%)

22.2

36.9

17.7

29.6

16.0

31.5

28.8

Source: MOFSL , Company

Other highlights from Annual Report



Contingent liabilities

for the bank grew ~10% in FY20 (4% CAGR over FY16–20),

resulting in decline in the proportion of total assets to ~74% v/s 120% in FY16

(82% in FY19).

Exhibit 49: Contingent liabilities constitute 74% of total assets

Contingent Liabilities (INR b)

Claims not acknowledged as debt

O/s forward exch. contracts

Guarantees given in India

Guarantees given outside India

Acceptances, Endorsements etc.

Others

Total

% of total assets

FY16

5,291

301

318

2,580

8,533

120%

FY17

4,699

366

360

2,741

8,179

95%

FY18

FY19

FY20

4,345

5,562

6,079

449

537

591

395

476

440

3,553

3,658

4,165

8,755

10,247 11,290

82%

74%

Source: MOFSL, Company



Fraud accounts:

The total number of fraud accounts reported during the year

stood at 7,580, with the amount involved at INR2.2b; of this, INR1.7b was the

amount that remained net of recoveries/write-offs, for which the bank created

100% provisions.

RBI imposes INR20m penalty in FY20:

In FY20, the RBI imposed a penalty of

INR10m for non-compliance of directions on KYC/AML standards and INR10m

for failure to undertake on-going due diligence in case of 39 current accounts

opened for bidding in an IPO.

PSLC purchase increased in FY20:

The bank saw an increase in the purchase of

PSLCs in the current year as the bank purchased PSLCs worth INR645b v/s

INR460b in FY19, while it sold PSLCs worth INR168b v/s INR117b in FY19.

Exhibit 50: PSLC certificate trends across years

INR b

PSLC bought during the year

PSLC sold during the year

FY17

32.7

15.2

FY18

277.7

7.3

FY19

459.5

117.8

FY20

645.2

167.5

Source: MOFSL, Company



Provision of reward points:

The bank further carries a total provision of INR7.3b

toward both credit card and debit card reward points.

29 June 2020

HDFC Bank

Exhibit 51: Provision for credit card and debit card reward points

INR m

Opening provision

Provision made during the year

Utilization/Write back

Closing Provision

FY15

1,509

1,129

638

2,001

FY16

2,001

1,795

732

3,064

FY17

3,064

3,342

2,094

4,312

FY18

4,312

2,620

2,221

4,711

FY19

4,711

3,876

2,556

6,031

FY20

6,031

5,179

3,869

7,342

Source: MOFSL, Company



Bancassurance fee:

This increased 28% YoY to INR28.2b from INR22b in FY19

and forms ~17% of the total fee. It was primarily led by an increase of 48% in life

insurance sales to INR21.8b, while fees from mutual declined ~28% YoY,

affected by change in regulations.

Exhibit 52: Banca income constitutes ~17% of the total fee income

25%

19%

Bancassurance Income (INRm)

17%

As a % of fee income

16%

18%

16%

17%

15%

11%

15%

14%

Source: MOFSL , Company

Bancassurance income was

driven by life insurance

sales, which grew ~50% YoY

Exhibit 53: Bancassurance fee – Sale of life insurance offset by moderation in mutual funds

Bancassurance Income (INR m)

Sale of Life Insurance

Sale of Non-Life Insurance

Sale of Mutual Fund

Total

Growth YoY (%)

FY15

FY16

4,540 6,618

1,371 1,561

3,966 2,917

9,876 11,095

56.6% 12.3%

FY17

7,984

1,576

4,251

13,810

24.5%

FY18

FY19 FY20

11,923

14,734 21,828

2,034

2,227 2,723

6,952

5,040 3,620

20,910

22,000 28,170

51.4%

5.2% 28.0%

Source: MOFSL, Company



The bank has opened over 2.5m accounts under the Pradhan Mantri Jan Dhan

Yojana (PMJDY) and enrolled 3.3m customers in social security schemes since its

inception. Furthermore, it has extended loans worth INR81.5b under the

Pradhan Mantri Mudra Yojana (PMMY).

Attrition among top management remains high; CEO’s transition an

important event



We note that attrition among the top paid employees who earned salaries of

more than INR10m has increased over the past two years. ~10% of such

employees exited the organization in FY20 after an average of ~14 years of

service with HDFCB. Among 19 such employees, three held positions of

Group/Business Head.

29 June 2020

HDFC Bank

Exhibit 54: Attrition among top paid employees increases over past two years

Employees with salary >INR10m who left the organization

As a % of total employees with salary >INR10m

Year of service with HDFC Bank

Group/Business head left during the year

FY17

FY18

FY19

12%

FY20

10%

Source: MOFSL, Company

Exhibit 55: Top management who left the organization

Designation

Group Head Equities, Private Banking, Third Party

Abhay Aima

Products, NRI & International Consumer Business

Ashok Khanna Group Head Secured Loans (Vehicles)

Nitin Chugh

Group Head Digital Banking

Rajesh Kumar Group Head Retail Credit and Risk

Source: MOFSL, Company



Exhibit 56: New top management appointments

Designation

Group Head – Treasury – Sales, Analytics and

Arup Rakshit

Overseas

Raveesh Bhatia Group Head – Corporate Banking North

Anjani Rathor Group Head - Digital Banking

Source: MOFSL, Company



The remuneration of non-managerial staff increased by ~10.2%, and that of key

managerial personnel by 21.1%. The percentage increase in median

remuneration was at ~13%.

Furthermore, the ratio of the remuneration of the MD & CEO to median

employees’ remuneration was at 282x, while that of the Executive Director was

at 128x. The MD & CEO earned remuneration of INR189.2m and the Executive

Director of INR86.4m in FY20.

ESOP:

The bank granted ~47.8m options in FY20, while the options that were

exercised stood at ~36.7m. This stood at a four-year high, with higher options

granted and exercised during the year.

Exhibit 57: Stock options granted and exercised in past five years (nos. in million)

Options Granted

Options Exercised

47.8

32.5

16.9

19.9

23.8

36.7

FY18

FY19

FY20

Source: MOFSL, Company

29 June 2020

HDFC Bank

Valuation and view



Corporate loan growth for HDFCB is picking up and compensating well for the

softness in its Retail portfolio (caused by muted growth in the Auto / Credit

Cards segment). Among retail assets, growth is witnessed primarily from

unsecured personal loans.

The fee income profile was marginally impacted in the current quarter due to

decline witnessed in economic activity on account of COVID-19. However, strong

cost control is likely to drive improvement in the bank’s return ratios. Besides

this, margins have improved sequentially due to decline in cost of funds, aided

by a strong/granular liability franchise. As corporate lending picks up, we believe

corporate fees would also reflect improving trends as economic activity revives.

Asset quality also improved, aided by the RBI announcement (17

Apr’20) on

NPA relaxation by excluding the moratorium period from the 90-day NPA

recognition norm. CV/CE and unsecured retail loans to the Self-Employed

segment need to be monitored amid COVID-19, and we expect rising

delinquency trends in the near term. PCR increased ~530bp to ~72%, while the

bank carries a floating provision of INR14.5b and contingent provision of

INR29.9b. Overall, we continue to expect NNPA to remain at 0.5% in FY22E.

We have seen some pickup in investments in branches/ATMs and calibration in

the workforce. Overall, we believe strong capitalization and liquidity levels

(surplus liquidity buffer of INR500b) should help HDFCB sustain its growth

momentum over the next few years.

Buy, with TP of INR1,250:

HDFCB has delivered strong growth despite economic

activity being impacted due to the COVID-19 outbreak. Moderation in retail

credit due to consumption slowdown was compensated well by the Wholesale

segment, which is driving overall loan growth. On the asset quality front,

slippages are likely to remain elevated due to COVID-19, which could keep credit

cost higher; however, higher provisioning buffers should limit the overall impact

on earnings. Furthermore, a strong liability franchise would support margins,

while higher liquidity levels would enable the bank to ride the current crisis and

gain higher market share. We estimate the loan book / PAT to grow at a CAGR of

16%/9% over FY20–22. The CEO’s succession, though, remains an important

event in the near term. Maintain Buy, with TP of INR1,250 (3.0x FY22E ABV).

Exhibit 58: SOTP-based pricing

HDFC Bank

HDB Financial Services

HDFC Securities

Total Value of Subs

Less: 20% holding Disc

Value of Subs (Post Holding Disc)

Target Price

Stake (%)

97.3

95.5

Total Value

INR b

6,340.0

524.2

117.5

641.7

128.3

513.3

6,853.4

Total Value

USD b

89.1

7.4

1.7

9.0

1.8

7.2

96.3

Value Per

Share INR

1,156

117

1,250

% of Total

Value

92.5

7.6

1.7

9.4

1.9

7.5

Rationale

3.0x FY22E ABV

4.5x FY22E Net worth

22x FY22E PAT

29 June 2020

HDFC Bank

Exhibit 59: One-year forward P/B

4.4

3.6

2.8

2.0

1.2

P/B (x)

Min (x)

Avg (x)

+1SD

3.8

3.1

2.4

Max (x)

-1SD

4.2

Exhibit 60: One-year forward P/E

P/E (x)

Min (x)

29.0

21.0

2.8

13.0

5.0

23.3

20.7

18.1

Avg (x)

+1SD

Max (x)

-1SD

26.0

3.4

15.6

17.8

Source: MOFSL, Company

Exhibit 61: DuPont Analysis: Return ratios to remain modest

Y/E March

Net Interest Income

Core Fee Income

Trading and others

Non-Interest income

Total Income

Operating Expenses

Employee cost

Others

Operating Profits

Core operating Profits

Provisions

PBT

Tax

RoA

Leverage (x)

RoE

FY15

4.14

1.23

0.43

1.66

5.37

2.59

0.88

1.71

3.22

2.79

0.38

2.83

0.94

1.89

10.3

19.4

FY16

4.25

1.23

0.43

1.65

5.48

2.61

0.88

1.74

3.29

2.86

0.42

2.87

0.98

1.89

9.6

18.3

FY17

4.21

1.12

0.44

1.56

5.33

2.51

0.82

1.68

3.27

2.83

0.46

2.82

0.97

1.85

9.7

17.9

FY18

4.16

1.31

0.27

1.58

5.74

2.35

0.71

1.65

3.38

3.11

0.61

2.77

0.96

1.81

9.8

17.9

FY19

4.18

1.34

0.19

1.53

5.71

2.26

0.67

1.59

3.44

3.26

0.65

2.79

0.96

1.83

9.0

16.5

FY20

4.05

1.38

0.30

1.68

5.73

2.21

0.69

1.53

3.51

3.22

0.88

2.64

0.75

1.89

8.7

16.4

FY21E

4.01

1.25

0.33

1.57

5.59

2.14

0.67

1.47

3.45

3.12

1.23

2.22

0.56

1.66

9.0

14.9

FY22E

3.96

1.25

0.32

1.57

5.54

2.17

0.68

1.49

3.37

3.04

1.17

2.20

0.55

1.65

9.2

15.1

29 June 2020

HDFC Bank

Financials and valuations

Income Statement

Y/E March

Interest Income

Interest Expense

Net Interest Income

Growth (%)

Non-Interest Income

Total Income

Growth (%)

Operating Expenses

Pre Provision Profits

Growth (%)

Core PPP

Growth (%)

Provisions (excl. tax)

PBT

Tax

Tax Rate (%)

PAT

Growth (%)

FY15

484.7

260.7

224.0

21.2

90.0

313.9

18.9

139.9

174.0

21.2

150.3

23.0

20.8

153.3

51.1

33.4

102.2

20.5

FY16

602.2

326.3

275.9

23.2

107.5

383.4

22.1

169.8

213.6

22.7

184.5

22.7

27.3

186.4

63.4

34.0

123.0

20.4

FY17

693.1

361.7

331.4

20.1

123.0

454.4

18.5

197.0

257.3

20.4

220.9

19.7

35.9

221.4

75.9

34.3

145.5

18.3

FY18

802.4

401.5

400.9

21.0

152.2

553.2

21.7

226.9

326.2

26.8

311.0

40.8

59.3

267.0

92.1

34.5

174.9

20.2

FY19

989.7

507.3

482.4

20.3

176.3

658.7

19.1

261.2

397.5

21.8

380.3

22.3

75.5

322.0

111.2

34.5

210.8

20.5

FY20

1,148.1

586.3

561.9

16.5

232.6

794.5

20.6

307.0

487.5

22.6

465.9

22.5

121.4

366.1

103.5

28.3

262.6

24.6

FY21E

1,367.5

709.6

657.9

17.1

258.2

916.1

15.3

351.0

565.1

15.9

532.8

14.3

201.8

363.3

91.4

25.2

271.9

3.5

(INR b)

FY22E

1,565.3

816.3

749.0

13.9

296.9

1,045.9

14.2

409.7

636.3

12.6

598.6

12.3

220.4

415.8

104.7

25.2

311.2

14.5

Balance Sheet

Y/E March

Equity Share Capital

Reserves & Surplus

Net Worth

Deposits

Growth (%)

of which CASA Dep

Growth (%)

Borrowings

Other Liabilities & Prov.

Total Liabilities

Current Assets

Investments

Growth (%)

Loans

Growth (%)

Fixed Assets

Total Assets

FY15

5.0

615.1

620.1

4,508.0

22.7

1,984.9

20.6

452.1

324.8

5,905.0

363.3

1,516.4

25.4

3,655.0

20.6

31.2

5,905.0

FY16

5.1

721.7

726.8

5,464.2

21.2

2,363.1

19.1

849.7

367.3

7,408.0

389.2

1,958.4

29.1

4,645.9

27.1

33.4

7,408.0

FY17

5.1

855.6

860.7

6,436.4

17.8

3,091.5

30.8

740.3

601.0

8,638.4

489.5

2,144.6

9.5

5,545.7

19.4

36.3

8,638.4

FY18

5.2

1,057.8

1,063.0

7,887.7

22.5

3,430.9

11.0

1,231.0

457.6

10,639.3

1,229.2

2,422.0

12.9

6,583.3

18.7

36.1

10,639.3

FY19

5.4

1,486.6

1,492.1

9,231.4

17.0

3,912.0

14.0

1,170.9

551.1

12,445.4

813.5

2,931.2

21.0

8,194.0

24.5

40.3

12,445.4

FY20

5.5

1,704.4

1,709.9

11,475.0

24.3

4,846.3

23.9

1,446.3

673.9

15,305.1

866.2

3,918.3

33.7

9,937.0

21.3

44.3

15,305.1

FY21E

5.5

1,923.4

1,928.9

13,311.0

16.0

5,537.4

14.3

1,494.4

761.6

17,495.9

1,199.2

4,231.7

8.0

11,427.6

15.0

48.8

17,495.9

FY22E

5.5

2,178.5

2,184.0

15,707.0

18.0

6,769.7

22.3

1,544.2

860.6

20,295.7

1,380.1

4,739.5

12.0

13,370.3

17.0

53.6

20,295.7

Asset Quality

Y/E March

GNPA

NNPA

GNPA Ratio

NNPA Ratio

Slippage Ratio

Credit Cost

PCR (Excl. Tech. write off)

FY15

34.4

9.0

0.9

0.2

1.6

0.5

73.9

FY16

43.9

13.2

0.9

0.3

1.6

0.5

69.9

FY17

58.9

18.4

1.1

0.3

1.5

0.6

68.7

FY18

86.1

26.0

1.3

0.4

2.1

0.8

69.8

FY19

112.2

32.1

1.4

0.4

1.9

0.9

71.4

FY20

126.5

35.4

1.3

0.4

1.9

1.0

72.0

FY21E

256.8

68.7

2.2

0.6

2.7

1.5

73.3

FY22E

263.7

67.6

1.9

0.5

2.5

1.4

74.4

29 June 2020

HDFC Bank

Financials and valuations

Ratios

Y/E March

Yield & Cost Ratios (%)

Avg. Yield-Earning Assets

Avg. Yield on loans

Avg. Yield on Inv.

Avg. Cost-Int. Bear. Liabilities

Avg. Cost of Deposits

Interest Spread

Net Interest Margin

Capitalization Ratios (%)

CAR

Tier I

Tier II

Business and Efficiency Ratios (%)

Loans/Deposit

CASA Ratio

Cost/Assets

Cost/Total Income

Cost/Core Income

Int. Expense/Int. Income

Fee Income/Total Income

Non Int. Inc./Total Income

Emp. Cost/Total Expense

Investment/Deposit

FY15

10.1

11.1

7.2

5.8

5.7

4.3

4.6

FY16

10.1

10.8

8.1

6.0

5.9

4.3

4.6

FY17

9.6

10.2

7.8

5.5

5.3

4.2

4.6

FY18

9.4

10.3

7.2

4.9

4.6

4.5

4.4

FY19

9.6

10.5

7.6

5.2

4.8

4.4

FY20

9.0

10.1

6.1

5.0

4.9

4.0

4.2

FY21E

9.1

10.0

7.0

5.1

4.9

4.0

4.2

FY22E

9.0

10.0

7.0

5.1

4.9

3.9

4.1

16.8

13.7

3.1

15.5

13.2

2.3

14.6

12.8

1.8

14.8

13.3

1.6

17.1

15.8

1.3

18.5

17.2

1.3

17.9

16.8

1.1

17.4

16.4

1.0

81.1

44.0

2.4

44.6

47.0

53.8

24.4

28.7

34.0

33.6

85.0

43.2

2.3

44.3

46.7

54.2

23.6

28.0

33.6

35.8

86.2

48.0

2.3

43.4

45.8

52.2

21.8

27.1

32.9

33.3

83.5

43.5

2.1

41.0

42.2

50.0

22.8

27.5

30.0

30.7

88.8

42.4

2.1

39.7

40.7

51.3

23.5

26.8

29.7

31.8

86.6

42.2

2.0

38.6

39.7

51.1

24.1

29.3

31.0

34.1

85.9

41.6

2.0

38.3

39.7

51.9

22.3

28.2

31.2

31.8

85.1

43.1

2.0

39.2

40.6

52.1

22.5

28.4

31.3

30.2

Valuation

RoE

RoA

RoRWA

Book Value (INR)

Growth (%)

Price-BV (x)

Adjusted BV (INR)

Price-ABV (x)

EPS (INR)

Growth (%)

Price-Earnings (x)

Dividend Per Share (INR)

Dividend Yield (%)

19.4

1.9

2.7

123.7

36.5

122.4

20.4

15.3

4.0

18.3

1.8

2.5

143.7

16.2

141.8

24.3

19.3

4.8

17.9

1.8

2.4

167.9

16.9

6.4

165.4

6.5

28.4

16.7

37.9

5.5

0.5

17.9

1.8

2.4

204.8

22.0

5.3

193.9

5.6

33.9

19.4

31.7

7.8

0.7

16.5

1.8

2.4

273.9

33.8

3.9

262.8

4.1

39.6

16.9

27.2

9.0

0.8

16.4

1.9

2.6

311.8

13.8

3.5

300.3

3.6

48.0

21.2

22.4

11.9

1.1

14.9

1.7

2.4

351.8

12.8

3.1

335.5

3.2

49.6

3.2

21.7

9.6

0.9

15.1

1.6

2.4

398.3

13.2

2.7

381.2

2.8

56.7

14.5

10.2

1.0

29 June 2020

HDFC Bank

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within

following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule

15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order

to conduct business with Institutional Investors based in the U.S., MOFSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities

International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S.

registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public

appearances and trading securities held by a research analyst account.

For Singapore

In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets

services license and an exempt financial adviser in Singapore.As per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and

Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to MOCMSPL by Monetary Authority of Singapore. Persons in Singapore should contact MOCMSPL in

respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of

which some of whom may consist of "accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the

SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and

inform MOCMSPL.

Specific Disclosures

1 MOFSL, Research Analyst and/or his relatives have financial interest in the subject company, as they have equity holdings in the subject company.

2 MOFSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company

3 MOFSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months

4 MOFSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report

5 Research Analyst has not served as director/officer/employee in the subject company

6 MOFSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

7 MOFSL has received compensation for investment banking/merchant banking/brokerage services from the subject company in the past 12 months

8 MOFSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months

9 MOFSL has not received any compensation or other benefits from third party in connection with the research report

10 MOFSL has not engaged in market making activity for the subject company

********************************************************************************************************************************

29 June 2020

HDFC Bank

The associates of MOFSL may have:

financial interest in the subject company

actual/beneficial ownership of 1% or more securities in the subject company

received compensation/other benefits from the subject company in the past 12 months

other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the

specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even

though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the

company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)

received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.

The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report

Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not

consider demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from

clients which are not considered in above disclosures.

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the

research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Terms & Conditions:

This report has been prepared by MOFSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and

may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of

MOFSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature.

The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,

representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The

report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOFSL will not treat recipients as

customers by virtue of their receiving this report.

Disclaimer:

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed,

in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose

and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report

constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities

discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives,

financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document

should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including

the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be

suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial

risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions

contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as

endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and

alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from time to time, effect

or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment

banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and

independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already

available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the

views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other

person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of

or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject

MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category

of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors,

employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may

arise from or in connection with the use of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees from, any

and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold

MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,

expenses that may be suffered by the person accessing this information due to any

errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website

www.motilaloswal.com.CIN

no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,

Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.

Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:

INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company

Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth Management

Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of

Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a

group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory

services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee

of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj

Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.

* MOFSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National

Company Law Tribunal, Mumbai Bench.

29 June 2020