HDFC Bank (HDFCBK) has consistently grown its market share in loans and deposits across credit cycles, and has emerged as the best-managed bank in India with robust profitability/growth metrics.
HDFC Bank (HDFCBK) has consistently grown its market share in loans and deposits across credit cycles, and has emerged as the best-managed bank in India with robust profitability/growth metrics. Increasing granularity of the balance sheet, a focus on fee income growth, an improvement in operating leverage aided by digital initiatives, and controlled credit costs backed by strong underwriting have enabled the bank to outperform most peers. We expect the bank to maintain its growth momentum (regardless of its systemic size) and further gain market share across business segments. This, coupled with steady revenue growth, a continued improvement in operating leverage and moderation in credit cost, will help accelerate earnings growth (24% CAGR over FY18-20e). Moreover, its subsidiaries – HDB Financial Services and HDFC Securities – are rapidly gaining scale and will further support valuations. We expect HDFCBK to deliver RoA/RoE of 1.96/17.4% in FY20e (RoE is suppressed as we have built in capital raise of `240 bn). We maintain our Buy rating with a target price of Rs 2,400.
Market share gains to continue; no size too big: Over the past 10 years, HDFCBK has steadily grown its loans/deposits market share to ~7.8/ 6.4% of the system, driven by steady branch addition (up 7x from 684 in FY07 to 4,715 in FY17), improving employee productivity (business/employee doubled over FY07-17), and effective use of technology to gain distribution efficiency (cost-to-core income ratio decreased 840bp to 44.5% over FY07-17). The bank has also recorded the highest incremental market share among peers. We expect HDFCBK to continue gaining market share to reach 10% by FY22, driven by robust growth in the vehicle portfolio, business banking and unsecured segments.
Retail loan growth remains strong; working diligently to expand the pie: HDFCBK has grown its retail book at a 27% CAGR over the past three years, significantly ahead of systemic retail loan growth. Enhanced focus on rural and semi-urban locations has helped the bank to gain strong traction in retail and SME loans. While the share of unsecured personal and credit card loans has increased, the bank’s credit monitoring framework remains robust, helping it maintain strong control on delinquency levels.
Robust third-party and bancassurance fees are driving overall fee growth: HDFCBK has built a strong and well-diversified fee income profile over the years. While fee income forms ~1.2% of average assets and ~23% of total income, the contribution of third-party distribution to total fees has steadily increased to 16% from 11% in FY14. This was driven by a 14% CAGR in third-party fees over FY12-17. Bancassurance income from HDFC Standard Life Insurance forms ~32% of HDFCBK’s third-party distribution fees. Valuation view: We expect HDFCBK to record 23% loan book CAGR and 24% PAT CAGR over FY18-20e, with RoA/RoE of 1.96/17.4% in FY20e. While margins may contract slightly due to intensifying competition, its robust fee income profile and strong control on operating leverage will continue driving a steady improvement in the return ratios (12bp improvement in RoA over FY18-20e). We arrive at a target price of Rs 2,400 (3.9x Mar’20e ABV and Rs 103 for subs) and maintain our Buy rating.