Professional Documents
Culture Documents
HDFC Bank Equity Research Report
HDFC Bank Equity Research Report
HDFC Bank Limited (HDFC Bank or the Bank) was incorporated in August 1994 in
the name of HDFC Bank Limited, with its registered office in Mumbai, India and
commenced operations as a Scheduled Commercial Bank in January 1995. HDFC Bank
along with its subsidiaries (HDFC Securities Limited and HDB Financial Services Limited)
is engaged in providing a wide range of banking and financial services in retail banking,
wholesale banking and treasury operations.
Over the last ten years, HDFC Bank has grown at a compounded annual growth rate of
29.55% and has emerged as a market leader across multiple products.
For FY 2017, HDFC Banks net interest margins stood at a healthy 4.33 %. ~ 30% of
its operating revenue came from non funded segments such as fees and commissions for
services. For the same period, net NPAs stood at 0.30 % far below the industry average for
private banks. 43.0% of total deposits were in the form of low cost CASA deposits as on
March 31, 2017.
As of March 31, 2017, HDFC Banks customer base was over 40 million and its distribution
network was at 4,715 branches and 12,260 ATMs in 2,657 cities. 52% of the total branches
are now in semi-urban and rural areas.
*HDFC split its equity in the ratio of 1:5 on 14 July 2011. EPS and P/E numbers are
adjusted to reflect the effect of split.
Key Financial Figures
Consolidated (Rs. Cr)
Profitability Analysis
Consolidated (%)
Net profit margin is arrived at by dividing profit after tax by the total income generated
(i.e. interest earned plus other income) and shows what is left for the shareholders as a
percentage of total income.
Other income largely constitutes of fee income such as commission and brokerage fees and
client based merchant foreign exchange trade, service charges from account maintenance,
transaction banking (including cash management services), syndication and placement fees,
processing fees from loans and commission on non-funded products (such as letters of
credit and bank guarantees) etc. Banks in developed countries derive nearly 50% of their
income from these non-funded sources. A high other income to net income ratio is
good for the bottom line (i.e. net profit) as income from this stream is derived without
significant mobilisation of deposits and hence the cost associated with this income is
relatively lower compared to interest income.
Key Balance Sheet Figures
Sources of (Rs. Cr)
Funds /
Liabilities
Money received
against warrants
Efficiency Analysis
Advances to Loan funds ratio: This ratio indicates the efficiency with which the bank is
able to deploy the funds it mobilises and is arrived at by dividing the banks total advances
by its total deposits (i.e. deposits + borrowings). A high advance to loan fund ratio indicates
that the bank might not have enough liquidity to cover any unforeseen fund requirements; if
the ratio is too low, banks may not be earning as much as they could be.
Return on Equity (ROE) or Return on Net Worth (RONW) : measures the amount
of profit which the company generates on money invested by the equity shareholders (i.e.
share capital + reserves and surplus). In short, ROE draws attention to the return generated
by the shareholders on their investment in the business. ROE is widely used in comparing
the profitability of the company with other companies in the same industry.
Valuation Analysis
Consolidated
Dividend History
The Company has maintained an average dividend yield of 1.64 % over the last 5 financial
years.
Liquidity and Credit Analysis
Consolidated (%)
NIM: Banks focus on lending or advancing money at a rate higher than the rate at which
they accept deposits. Net Interest Margin is calculated by dividing the difference between
Interest earned (on advances) and interest expended (on deposits) by the amount of
(average) Invested Assets. If this ratio rises from one period to the next, it indicates that the
bank is able to deploy its funds more efficiently which results in greater profitability.
Capital Adequacy Ratio (CAR): or Capital to Risk Weighted Assets Ratio (CRAR) is a
measure of a banks capital (net worth plus subordinated debt) expressed as a percentage of
a banks risk weighted credit exposures (loans).
Two types of capital are measured: tier I capital, which can absorb losses without a bank
being required to cease trading (such as ordinary share capital and free reserves); and tier II
capital, which can absorb losses in the event of a winding-up and so provides a lesser degree
of protection to depositors (such as long term unsecured loans and revaluation reserves
which is taken at a discount of 55 % while determining its value for inclusion in Tier II
capital).
Measuring credit exposures requires adjustments to be made to the amount of assets shown
on a banks balance sheet. This is done by weighting the loans made by a bank according to
their degree of riskiness, e.g. loans to Governments are given a 0 %weighting whereas loans
to individuals are weighted at 100 %. Similarly off-balance sheet items such as guarantees
and foreign exchange contracts are also weighted for their riskiness. On-balance sheet and
off-balance sheet credit exposures are added to get total risk weighted credit exposures.
As per the Basel II norms the minimum capital adequacy ratios that apply are:
Tier I capital to total risk weighted credit exposures to be not less than 4 %;
Total capital (Tier I plus Tier II less certain deductions) to total risk weighted credit
exposures to be not less than 8%.
The RBI currently prescribes a minimum capital of 9 % of risk-weighted assets, which is
higher than the internationally prescribed percentage of 8 %.
Applying minimum capital adequacy ratios serves to protect depositors and promote the
stability and efficiency of the financial system.
Ownership pattern
In its latest stock exchange filing dated 31 March 2017, HDFC Bank reported a promoter
holding of 26.00 %. Large promoter holding indicates conviction and sincerity of the
promoters. We believe that a greater than 35 % promoter holding offers safety to the retail
investors.
At the same time, institutional holding in the Company stood at 43.35 % (FII+DII). Large
institutional holding indicates the confidence of seasoned investors. At the same time, it can
also lead to high volatility in the stock price as institutions buy and sell larger stakes than
retail participants.
Recommendation
It is recommended to buy HDFC Bank with a one-year target price of 1858.55. Below is the
technical analysis for the same with trendline representing the resistance.
Current Market Price: 1767.50 24 Aug 2017 Open: 1774.90 High: 1774.95 Low: 1759.15
1 Year Target Price: 1858.55