23 April 2015

4QFY15 Result Update | Sector: Financials

HDFC Bank

Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415

Vallabh Kulkarni (Vallabh.Kulkarni@MotilalOswal.com); +91 22 3982 5430

BSE SENSEX S&P CNX CMP: INR1,014 TP: INR1,350 (+33%) Buy 27,735 8,398

Bloomberg HDFCB IN

Equity Shares (m) 2,506.5

M.Cap (INR b)/(USD b) 2,542/40.2

52-Week Range (INR) 1,105/712

1, 6, 12 Rel. Per (%) -2/9/17

Avg Val(INRm)/Vol’000 1941/2141

Free float (%) 78.3

Financials & Valuation (INR Billion)

Y/E Mar 2015 2016E 2017E

NII 224.0 282.8 350.0

OP 174.0 219.2 269.4

NP 102.2 128.4 160.5

NIM (%) 4.6 4.7 4.7

EPS (INR) 40.8 51.2 64.0 EPS Gr. (%) 15.3 25.7 25.0

BV/Sh. (INR) 247.4 286.7 335.8

ABV/Sh. (INR) 243.8 283.3 332.1

RoE (%) 19.4 19.2 20.6

RoA (%) 1.9 2.0 2.0

Payout (%) 23.4 23.4 23.4

Valuations

P/E(X) 24.9 19.8 15.8

P/BV (X) 4.1 3.5 3.0

P/ABV (X) 4.2 3.6 3.1

Div. Yield (%) 0.8 1.0 1.3

In-line performance; healthy growth continues; NSL - lowest in the industry n HDFC Bank's (HDFCB) 4QFY15 PAT grew 21% YoY (in-line) to INR28b. Stable NIM

(4.4%), improving fee growth (+21% YoY, 9-quarter high) and strong CASA momentum (+310bp QoQ) were the key highlights of the quarter.

n GNPAs improved by 7bp QoQ to 0.93%. During the quarter, bank sold an large consortium account to ARC (exposure of ~INR5.5b, system exposure of ~INR350-400b). HDFCB booked a loss of ~INR2b on the transaction (fully provided in 4Q by adjusting against floating provisions) and received ~INR400m security receipts. NSL remains the lowest at 30bp.

n Although retail segment reported improved YoY growth (15.5%, five-quarter high), its proportion in overall loans declined to 47.3% (19-quarter low), led by strong growth in the wholesale segment.

n While on a reported basis, CV and CE (-3% QoQ, -11% YoY – an 13-quarter low of INR128b) and business banking (-12% QoQ,-25% YoY) are the key drag to retail loan growth, management stated that on a segmental basis (including wholesale-customer having >INR50m exposure), business banking momentum is healthy (+17% YoY). CV meanwhile has bottomed out (flat QoQ, +8% YoY).

Valuation and view: HDFCB is best-placed in the current environment, with ~44% CASA ratio, growth outlook of at least 1.3x industry and least asset quality risk. With CET1 of ~14%, strong capacity building in the moderate growth cycle (branches at 4,014 v/s 1,412 in FY09) and significant digitalization initiatives, the bank is well placed to benefit from the expected pick-up in the economic growth cycle. Despite the recent capital raising, RoE is expected to be ~20%. Comfort on earnings (RoA at ~2%) remains high. Maintain Buy with a target price of INR1,350 (4x FY17E BV).

Investors are advised to refer through disclosures made at the end of the Research Report.

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

23 April 2015 2

HDFC Bank

Exhibit 1: Quarterly Performance: In-line with estimate Y/E March 4QFY15A 4QFY15E V/S our Est Comments Net Interest Income 60,132 60,127 0 Inline performance; NIMs stable QoQ % Change (Y-o-Y) 21 21 Other Income 25,638 24,197 6 Beat on fees led by higher than expected Forex and trading profits Net Income 85,769 84,324 2 Operating Expenses 38,550 37,269 3 Operating Profit 47,220 47,055 0 Operating leverage help boost profitability % Change (Y-o-Y) 25 25 Other Provisions 5,767 4,765 21 Higher than expected NPA provisioning Profit before Tax 41,453 42,290 -2 Tax Provisions 13,384 14,273 -6 Net Profit 28,069 28,017 0 Higher provisioning compensated by beat on fee income leading to

inline PAT % Change (Y-o-Y) 21 20

Source: MOSL, Company

GNPA improvement led by sale to ARC; OSRL stable QoQ n In absolute terms, GNPA and NNPA declined by 1% QoQ each. HDFCB sold one

corporate account (of INR 5.5b) which had slipped into NPA during the quarter. Bank booked a loss of ~INR2b (full provided in 4Q by adjusting against floating provisions). Thus, gross slippages increased to INR16.3b (annualized slippage ratio of ~2.2%) vs. ~INR10b in 3QFY15 (based on basel disclosures).

n In percentage terms, GNPA stood at 0.93% (down 7bp QoQ) and NNPA percentage was at 0.2% (down 10bp QoQ). Restructured standard loan portfolio (including pipeline) remained stable QoQ at 0.1% of loans and consequently net stress loans also declined (10bp) QoQ to 30bp.

Retail loans proportion at 18 quarter low; Growth driven by wholesale book n Reported loans grew 21% YoY and 5% QoQ mainly driven by strong growth in

wholesale segment (+6% QoQ and +26% YoY). As per the management, sequential growth in retail loans (+5% QoQ) in 4Q continues to remain lower than the seasonal trend of +7-8% QoQ growth reported in the previous years (mainly dragged down by CV and CE growth).

n Retail loan portfolio growth was led by strong momentum in Home loans (+21% QoQ and 25% YoY; higher buy back from HDFC limited during the quarter), Kissan gold cards (+19% QoQ and 53% YoY) and Loan against shares (+13% QoQ and 21% YoY).

n Growth in unsecured segments remained robust as personal loans grew +4% QoQ (+21% YoY) and credit cards (+5% QoQ and 32% YoY).

n While on a reported basis, CV and CE (-3% QoQ, -11% YoY – an 13 quarter low of INR128b) and business banking (-12% QoQ,-25% YoY) are key drag to retail loan growth, management mentioned that on segmental basis (including wholesale –customer having >INR50m exposure) business banking momentum (+17% YoY) is healthy whereas, CV has bottomed out (flat QoQ, +8% YoY).

n Domestic corporate and international loans grew 6% QoQ and 26% YoY. This segment formed ~53% of loan book. Corporate banking loan growth is largely driven by working capital and trade finance related products; lower focus on term loans. International book formed ~8% of the overall loan book.

Lowest Net stress loans in the industry at 30bp

Strong growth in Home loans led by higher buyback

from HDFC Limited in 4QFY15

23 April 2015 3

HDFC Bank

NIM stable QoQ; CASA ratio up 310bp n NIM remained stable QoQ at 4.4% as the impact of decline in CD ratio (-270bp

QoQ) was compensated by improvement in CASA ratio (+310bp QoQ to 44%). n CASA deposits accounted for ~80% of the incremental growth in deposits during

the quarter. CASA deposits grew 21% YoY and 17% QoQ. n NII growth (21.4% YoY and +5.5% QoQ) continues to be marginally higher than

loan growth n Bank added 611 branches in FY15; ~60% of these branch additions happened in

4QFY15. Fee income growth tracking loan growth n HDFCB reported continued traction in fee income (+21% YoY vs 15%/13% YoY in

3Q/2QFY15). Management indicated that third party distribution fees had some lumpiness in 4Q, however all other line items witnessed sustained improvement.

n Fee income growth was driven by (a) Pickup in third party business especially Mutual Fund distribution (b) continued momentum in forex income (+30% QoQ and YoY each) and (c) healthy growth in Auto and Personal loans (high processing fees).

Higher branch expansion lifts opex growth to 8 quarter high n Overall opex especially employee expense growth picked up during the quarter

led by focus on capacity building and cost of digitalization initiatives. n Opex grew 21% YoY (+12% QoQ) led by 25% YoY growth in employee expenses.

Bank added ~1,750 employees during the quarter taking the overall number of employees to ~78,000.

n Cost to Income ratio increased 260bp QoQ to 47.2% in 4QFY15. As the branches mature, management expects cost to Income ratio to stabilize over the medium term.

Other highlights n During the quarter bank added 355 (59 in 3QFY15, and 611 in FY15) branches

and 133 ATMs (118 in 3QFY15 and 510 in FY15). Additionally, management plans to open ~300 branches per annum going forward.

n CAR stood at 16.8% with Tier 1 at 13.7%. Conference Call highlights Balance Sheet related n Retail disbursement growth especially in Auto (incl. CV), PL, HL and Business

banking remained strong at average growth of 20% YoY partially due to lower base of 4QFY14. M&HCV growth robust at 40% YoY; LCV growth muted; gaining market share in Auto loans.

n Unsecured loans, Auto and home loans to drive near term retail growth. Strong underlying momentum seen from 2HFY16

n Business banking from a segment perspective grew 21% YoY. Decline seen in the retail business banking (-3% QoQ and -20% YoY) is partially due to some of customers moving to wholesale segment

NII growth continues to be marginally better than

loan growth

Strong exchange profits drove fee income growth

in 4QFY15

Despite strong expansion, opex growth has lagged

revenue growth in the last 10 quarters

23 April 2015 4

HDFC Bank

n Higher deposit growth due to one-off CA balances in 4Q; SA balance steadily improving due to better cross sell and digital initiatives. HDFC Bank does not offer SA interest rate of more than 4% in any of its products

n Quick Turn-around-time (TAT) and better service levels along with competitive pricing with increased customer acquisition through better distribution, brand and product to ensure market share gains going forward

n Increase in Investment book due to growth in Commercial Paper from large corporate customers

P&L related n Provisions break up (INR5.8b in 4QFY15) – General provisions (INR1.2b), NPA

provisions (INR4.3b) and others (INR0.3b). n 2/3rd of loan book is not linked to base rate, while 2/3rd of term deposits are

short term in nature (upto 12 months). Hence, change in base rate not going to meaningfully impact NIMs.

n No plans to change the 4% rate on SB account. Initiatives on digital and multiple loan products would strengthen market position in low cost deposits.

n Higher share of lumpy fees in Third Party Distribution (especially Mutual Funds) in 4Q; however, other fee line items showing a sustainable growth rate.

n Base rate calculation is already based on marginal cost of funds Asset Quality n 4QFY15 NPA movement: Additions (INR16.3b), Reductions (INR16.6b);

Annualized slippage ratio of 2.2% n Full Year NPA movement: Additions (INR47.9b), Reductions (INR43.4b).

Recoveries (INR14b) and Updradations (INR10.8b). n Calculated PCR stands at 73%. However, it stood at 164% adjusted for special,

general and floating provisions. Outstanding floating provisions at INR15.2b n Outstanding SRs stood at INR2.6b Data points n Employee strength- 78,000 n Total customers including Jan Dhan – 32m n RWA - INR4,230b

23 April 2015 5

HDFC Bank

Valuation and view n Structural drivers in place with (1) CASA ratio of ~44%, (2) growth outlook of at-

least 1.3x the industry growth, (3) improving operating efficiency, (4) expected traction in income due to strong expansion in branch network, and (5) best in the class asset quality.

n Retail loan growth is bottoming out and with the pickup in economic growth we expect its contribution to overall loans to go up. In the near term high ROE retail products like Unsecured retail loans, LAS etc will drive growth in our view. HDFCB has built capacity in downcycle to capture opportunities in the wholesale business and we expect it to play out as the risk aversion will reduce.

n Initial signs of core revenue growth pick up: Over the last 2-3 quarters, bank’s core revenue growth has accelerated to 21% YoY (16% in FY14 and 22% in FY13). With the improvement in economic growth and loan growth core revenues are expected to remain 21%+ from hereon.

n Despite pricing pressure NIMs are expected to remain at current levels as a) CASA growth will pick up b) benefit of falling rate cycle to occur due to high share of fixed rate retail loans (~70% of book) c) high yielding retail loans contribution to rise and d) capital raise to provide free float benefit (benefit of ~15bp to NIMs)

n Biggest risk to earnings for private financials is the implementation of dynamic provisioning by RBI wherein, HDFCB is best placed due to floating provisions created during the last three years. HDFCB carries floating provisions of INR15.2b created to smoothen earnings growth led by better-than-factored credit cost on retail loans.

n Earnings CAGR of 25%, best amongst large private banks, with core income growth pick up led by healthy loan growth, stable NIMs and gradual improvement in fee income. Further, opex growth is expected to be lower at 19% CAGR (strong operating leverage) over FY15/18 resulting into core PPP growth of 26%+.

n Attractive valuations for strong liability franchise: Over the last 12 years, HDFCB’s market share has increased significantly in (1) retail loans, (2) low cost deposits and (3) higher share in profitability; indicating the strength of its franchisee. Strong fundamentals and near nil stress loans would enable the bank to gain further market share. RoEs are expected to be best amongst private banks at ~20%. Maintain Buy.

Exhibit 2: One year forward P/BV

Source: Company, MOSL

Exhibit 3: One year forward P/E

Source: Company, MOSL

Buy with a target price of INR1,350 (4x FY17E BV)

23 April 2015 6

HDFC Bank

Exhibit 4: We largely maintain our estimates INR b Old Estimates New Estimates % Change FY16 FY17 FY16 FY17 FY18 FY16 FY17 Net Interest Income 275.0 339.1 282.8 350.0 437.6 2.8 3.2 Other Income 103.6 121.6 101.4 117.0 135.3 -2.1 -3.8 Total Income 378.6 460.7 384.2 466.9 572.9 1.5 1.4 Operating Expenses 162.6 197.3 165.1 197.5 236.3 1.5 0.1 Operating Profits 216.0 263.4 219.2 269.4 336.5 1.5 2.3 Provisions 24.4 31.4 26.1 28.0 35.5 PBT 191.6 232.0 193.1 241.4 301.0 0.8 4.1 Tax 64.2 76.5 64.7 80.9 100.8 0.8 5.7 PAT 127.4 155.4 128.4 160.5 200.2 0.8 3.3 Loans 4,509 5,636 4,532 5,665 7,081 0.5 0.5 Deposits 5,288 6,610 5,500 6,820 8,456 4.0 3.2 Margins (%) 4.8 4.8 4.7 4.7 4.8 Credit Cost (%) 0.6 0.6 0.6 0.5 0.5 RoA (%) 2.0 2.0 2.0 2.0 2.0 RoE (%) 19.3 20.2 19.2 20.6 21.8

Exhibit 5: DuPont Analysis: Strong improvement in risk adjusted NIMs and operating leverage; RoAs at a decadal high (%) Y/E March FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Interest Income 9.4 10.5 8.1 8.2 9.1 9.5 9.2 9.0 9.1 9.1 9.2

Interest Expended 4.4 5.6 3.8 3.8 4.9 5.2 5.1 4.8 4.8 4.7 4.7

Net Interest Income 5.0 4.8 4.3 4.4 4.2 4.3 4.1 4.1 4.3 4.4 4.5

Core Fee Income 1.6 1.5 1.5 1.4 1.4 1.3 1.3 1.2 1.2 1.1 1.1

Fee to core Income 23.8 23.1 25.9 24.0 24.6 23.9 23.8 22.7 21.2 20.4 19.5

Core Income 6.6 6.3 5.8 5.8 5.6 5.6 5.4 5.4 5.5 5.5 5.6

Operating Expenses 3.8 3.8 3.2 3.1 3.0 3.0 2.7 2.6 2.5 2.5 2.4

Cost to Core Income 58.2 59.6 55.3 53.8 54.3 54.1 49.6 48.3 46.0 44.9 43.5

Employee cost 1.2 1.4 1.1 1.1 1.1 1.1 0.9 0.9 0.9 0.8 0.8

Others 2.7 2.3 2.1 2.0 1.9 2.0 1.8 1.7 1.7 1.6 1.6

Core operating Profits 2.8 2.5 2.6 2.7 2.5 2.6 2.7 2.8 3.0 3.0 3.1

Trading and others 0.7 0.9 0.8 0.6 0.5 0.5 0.5 0.4 0.4 0.3 0.3

Operating Profits 3.4 3.4 3.3 3.3 3.1 3.1 3.2 3.2 3.4 3.4 3.4

Provisions 1.4 1.3 1.2 0.9 0.6 0.5 0.4 0.4 0.4 0.4 0.4

NPA 1.1 1.2 1.1 0.5 0.4 0.3 0.4 0.3 0.4 0.3 0.3

Others 0.2 0.1 0.1 0.5 0.3 0.1 0.0 0.0 0.0 0.0 0.0

PBT 2.0 2.1 2.1 2.3 2.4 2.6 2.9 2.8 3.0 3.0 3.1

Tax 0.6 0.7 0.7 0.8 0.8 0.8 1.0 0.9 1.0 1.0 1.0

Tax Rate 30.3 32.0 31.3 32.5 31.2 31.0 33.6 33.4 33.5 33.5 33.5

RoA 1.4 1.4 1.5 1.6 1.7 1.8 1.9 1.9 2.0 2.0 2.0

Leverage (x) 12.5 11.9 11.1 10.7 11.1 11.2 11.2 10.3 9.7 10.2 10.6

RoE 17.7 16.9 16.1 16.7 18.7 20.3 21.3 19.4 19.2 20.6 21.8

Source: Company, MOSL

23 April 2015 7

HDFC Bank

Exhibit 6: DuPont Analysis: Continued branch expansion led to higher opex in 4QFY15 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 NII 4.19 4.21 4.19 4.38 4.33 4.23 4.12 4.13 4.21 4.40 4.36 4.27 Fees (ex-forex) 1.32 1.32 1.49 1.41 1.26 1.28 1.40 1.27 1.14 1.23 1.38 1.30

Fees to core Inc 31.50 31.43 35.50 32.18 29.07 30.25 33.98 30.71 27.19 27.88 31.69 30.51 Core Income 5.51 5.54 5.67 5.79 5.59 5.50 5.52 5.40 5.35 5.63 5.75 5.58 Opex 3.01 2.91 2.93 3.20 2.98 2.77 2.58 2.65 2.59 2.79 2.65 2.74

Cost Core Inc (%) 54.69 52.63 51.68 55.24 53.27 50.32 46.62 49.04 48.32 49.63 46.04 49.12 Employee Exps. 1.14 1.04 1.06 1.03 1.09 0.98 0.87 0.88 0.92 0.93 0.87 0.94 Other Expenses 1.87 1.87 1.88 2.17 1.89 1.79 1.71 1.76 1.67 1.86 1.78 1.80 Core Oper. Profit 2.49 2.62 2.74 2.59 2.61 2.73 2.95 2.75 2.77 2.84 3.10 2.84 Trading and others 0.57 0.27 0.54 0.43 0.63 0.46 0.51 0.40 0.36 0.41 0.56 0.52 Operating Profit 3.07 2.89 3.28 3.02 3.24 3.20 3.46 3.15 3.13 3.24 3.66 3.36 Provisions 0.67 0.42 0.43 0.31 0.52 0.36 0.35 0.24 0.39 0.36 0.43 0.41 PBT 2.40 2.47 2.86 2.72 2.72 2.83 3.11 2.91 2.74 2.88 3.23 2.95 Tax 0.78 0.78 0.90 0.79 0.92 0.96 1.04 0.97 0.92 0.98 1.09 0.95

Tax Rate 32.30 31.53 31.56 29.01 33.65 33.94 33.53 33.40 33.56 33.93 33.75 32.29 ROA 1.62 1.69 1.95 1.93 1.81 1.87 2.07 1.94 1.82 1.90 2.14 2.00

Leverage (x) 11.34 11.35 11.07 10.94 10.94 10.74 10.79 11.11 10.98 10.57 10.41 9.90 ROE 18.43 19.21 21.62 21.10 19.77 20.10 22.32 21.55 19.95 20.10 22.27 19.75

Source: Company, MOSL

23 April 2015 8

HDFC Bank

Story in charts

Exhibit 7: Robust loan growth led by wholesale book

Source: MOSL, Company

Exhibit 8: Deposits growth driven by momentum in CASA

Source: MOSL, Company

Exhibit 9: CASA ratio bounces back after a decline 3QFY15

Source: MOSL, Company

Exhibit 10: Margins remained stable QoQ

Source: MOSL, Company

Exhibit 11: Retail loan growth picking up gradually Loan Break-up (INR b)

4Q FY15

4Q FY14

YoY Gr (%)

3Q FY15

QoQ Gr (%)

Auto 405 331 23 400 1 PL 258 204 27 248 4 LAS 14 11 21 12 13 2Wheerlers 42 33 25 40 5 CV and CE 128 144 -11 132 -3 CC 162 123 32 154 5 Bus. Banking 188 250 -25 213 -12 Home loans 241 193 25 200 21 Gold loans 41 40 0 39 4 Kissan gold cards 162 106 53 136 19 Others 89 61 45 74 19 Retail loans 1,728 1,497 15 1,648 5 Corp and International 1,927 1,533 26 1,823 6 Total loans 3,655 3,030 21 3,471 5

Source: MOSL, Company

Exhibit 12: ..however weakness in CV/CE portfolio persists

Source: MOSL, Company

23 April 2015 9

HDFC Bank

Story in charts

Exhibit 13: Fee income growth at 9 quarter high

Source: MOSL, Company

Exhibit 14: CD Ratio declined during the quarter

Source: MOSL, Company

Exhibit 15: Highest ever branch additions of 611 in FY15

Source: MOSL, Company

Exhibit 16: GNPA improves led by asset sale to ARC

Source: MOSL, Company

83 82 8479

83 85 8581

85 86 8582 84 84 84

81

1QFY

12

1HFY

12

9MFY

12

FY12

1QFY

13

1HFY

13

9MFY

13

FY13

1QFY

14

1HFY

14

9MFY

14

FY14

1QFY

15

1HFY

15

9MFY

15

FY15

CD Ratio

23 April 2015 10

HDFC Bank

Exhibit 17: Quarterly Snapshot FY14 FY15 Variation (%) Cumulative Numbers 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY FY14 FY15 YoY Gr (%) Profit and Loss (INR m)

Net Interest Income 44,187 44,765 46,348 49,527 51,716 55,110 56,999 60,132 5 21 184,827 223,957 21

Other Income 19,256 18,444 21,483 20,014 18,506 20,471 25,349 25,638 1 28 79,196 89,963 14

Trading profits 1,995 -1,733 509 333 250 951 2,655 1,961 -26 489 1,104 5,817 427

Exchange Profits 3,143 5,014 3,332 2,521 2,242 2,217 2,534 3,287 30 30 14,010 10,280 -27

Others (Ex non core) 14,118 15,163 17,642 17,160 16,014 17,303 20,160 20,390 1 19 64,082 73,866 15

Total Income 63,443 63,209 67,830 69,541 70,222 75,581 82,348 85,769 4 23 264,023 313,920 19

Operating Expenses 30,382 29,342 28,951 31,747 31,784 34,979 34,563 38,550 12 21 120,422 139,876 16

Employee 11,091 10,357 9,730 10,612 11,259 11,669 11,325 13,256 17 25 41,790 47,510 14

Others 19,291 18,985 19,221 21,135 20,525 23,310 23,238 25,294 9 20 78,632 92,366 17

Operating Profits 33,061 33,867 38,880 37,794 38,438 40,602 47,786 47,220 -1 25 143,602 174,045 21

Provisions 5,271 3,859 3,888 2,861 4,828 4,559 5,604 5,767 3 102 15,880 20,758 31

PBT 27,790 30,007 34,991 34,933 33,610 36,043 42,181 41,453 -2 19 127,721 153,287 20

Taxes 9,351 10,184 11,734 11,667 11,280 12,228 14,236 13,384 -6 15 42,937 51,128 19

PAT 18,439 19,823 23,257 23,266 22,330 23,815 27,945 28,069 0 21 84,785 102,160 20

Asset Quality GNPA 27,190 29,417 30,178 29,893 33,562 33,617 34,679 34,384 -1 15 NNPA 6,890 7,672 7,973 8,200 10,074 9,173 9,037 8,963 -1 9 GNPA (%) 1.0 1.1 1.0 1.0 1.1 1.0 1.0 0.9 -6 -5 NNPA (%) 0.3 0.3 0.2 0.3 0.3 0.3 0.3 0.2 -10 -10 PCR (Calculated, %) 74.7 73.9 73.6 72.6 70.0 72.7 73.9 73.9 -1 137 Ratios (%) Fees to Total Income 22.3 24.0 26.0 24.7 22.8 22.9 24.5 23.8 24.3 23.5

Cost to Core Income 49.4 45.2 43.0 45.9 45.4 46.9 43.4 46.0 48.4 47.0 Tax Rate 33.6 33.9 33.5 33.4 33.6 33.9 33.8 32.3 33.6 33.4 CASA (Reported) 44.7 45.0 43.7 44.8 43.0 43.2 40.9 44.0

Loan/Deposit 85.3 85.8 85.0 82.5 83.9 83.8 83.8 81.1 RoA 1.8 1.9 2.1 1.9 1.8 1.9 2.1 2.0 RoE 19.8 20.1 22.3 21.5 20.0 20.1 22.3 19.8 Margins (%) - Calculated Yield on loans 11.8 11.7 11.6 11.3 11.4 11.4 11.3 11.0 -29 -29 11.6 11.3 -32

Yield On Investments 8.2 8.9 8.7 7.7 7.6 8.3 8.2 8.1 -4 48 8.4 8.1 -30

Yield on funds 10.5 10.8 10.6 10.0 10.2 10.4 10.3 10.1 -25 2 10.5 10.2 -25

Cost of funds 6.2 6.5 6.4 5.8 5.9 6.0 6.1 5.9 -18 5 6.2 6.0 -26

Spreads 4.3 4.3 4.2 4.2 4.3 4.4 4.3 4.2 -8 -3 4.3 4.3 1

Margins 4.8 4.8 4.6 4.6 4.7 4.8 4.7 4.7 -9 4 4.7 4.7 2

Margins (%) - Reported 4.6 4.3 4.2 4.4 4.4 4.5 4.4 4.4 0 0 4.4 4.4 5

Source: MOSL, Company

23 April 2015 11

HDFC Bank

Exhibit 18: Quarterly Snapshot continued FY13 FY14 FY15 Variation (%)

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q QoQ YoY

Balance Sheet (INR b)

ESC 5 5 5 5 5 5 5 5 5 5 5 5 4 4

Reserves and Surplus 311 329 350 357 379 400 424 430 456 482 512 615 20 43

Net Worth 316 333 354 362 384 405 429 435 460 487 517 620 20 43

Deposits 2,575 2,741 2,841 2,962 3,033 3,130 3,492 3,673 3,721 3,907 4,141 4,508 9 23

Borrowings+Sub Debt 261 310 316 330 391 393 438 394 386 385 397 452 14 15

Other Liabiliites 448 389 326 349 355 383 322 413 346 320 294 325 11 -21

Total Liabilities 3,600 3,774 3,837 4,003 4,163 4,312 4,681 4,916 4,914 5,100 5,349 5,905 10 20

Cash 183 217 200 146 190 199 213 253 221 204 210 275 31 9

Money at call 57 50 47 127 64 81 139 142 80 113 121 88 -27 -38

Investments 902 917 960 1,116 1,048 1,019 1,106 1,210 1,237 1,296 1,340 1,665 24 38

Advances 2,133 2,316 2,415 2,397 2,586 2,686 2,967 3,030 3,121 3,273 3,471 3,655 5 21

Total earning assets 3,092 3,284 3,422 3,640 3,699 3,786 4,213 4,382 4,438 4,681 4,931 5,408 10 23

Fixed Assets 24 25 26 27 29 29 29 29 29 29 29 31 6 6

Other Assets 301 248 190 190 246 297 226 251 226 186 178 191 7 -24

Total Assets 3,600 3,774 3,837 4,003 4,163 4,312 4,681 4,916 4,914 5,100 5,349 5,905 10 20

Loan Break Up (%)

Retail 52.4 53.2 53.8 56.9 54.3 53.6 49.7 49.4 48.1 48.3 47.5 47.3 -20 -211

Auto Loans 12.9 12.5 12.4 12.9 12.5 12.1 11.3 10.9 11.1 11.5 11.5 11.1 -44 18

Personal Loans 6.9 6.8 7.0 7.3 7.2 7.2 6.8 6.7 6.9 7.1 7.1 7.1 -8 33 Loan against

securities 0.5 0.4 0.4 0.5 0.4 0.4 0.3 0.4 0.3 0.3 0.3 0.4 3 0

Two wheeler 1.2 1.2 1.2 1.3 1.2 1.2 1.1 1.1 1.1 1.1 1.1 1.1 0 4

CV & CE 6.8 7.1 6.8 6.7 6.5 6.3 5.6 4.8 4.3 4.2 3.8 3.5 -31 -126

Credit Cards 3.6 3.7 4.1 4.2 4.1 4.0 3.9 4.0 4.3 4.3 4.4 4.4 -1 37

Business Banking 9.2 9.3 9.6 10.2 9.2 9.6 9.0 8.3 7.1 6.7 6.1 5.2 -100 -311

Home loans 6.4 6.7 6.6 7.0 6.6 6.1 5.4 6.4 6.3 6.0 5.8 6.6 85 23

Gold loans 1.6 1.7 1.9 2.1 1.8 1.6 1.4 1.3 1.2 1.2 1.1 1.1 -1 -22

Kissan Gold Cards 2.1 2.9 2.9 3.5 3.5 3.9 3.9 4.4 50 94

Other Retail loans 3.4 3.7 1.7 2.2 2.3 2.2 1.9 2.0 2.0 2.0 2.1 2.4 28 40

Corp. & International 47.6 46.8 46.2 43.1 45.7 46.4 50.3 50.6 51.9 51.7 52.5 52.7 20 211

Franchise

Branches 2,564 2,620 2,776 3,062 3,119 3,251 3,336 3,403 3,488 3,600 3,659 4,014 10 18

ATM 9,709 10,316 10,490 10,743 11,088 11,177 11,473 11,256 11,428 11,515 11,633 11,766 1 5

Source: Company, MOSL

23 April 2015 12

HDFC Bank

Exhibit 19: Financials: Valuation metrics

62.34 Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%)

(INR) (USDb) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

ICICIBC* Buy 312 28.9 23.0 27.1 10.7 8.7 131 150 1.89 1.58 1.63 1.64 15.8 16.4

HDFCB Buy 1,014 40.7 52.0 63.1 19.5 16.1 287 336 3.53 3.02 2.00 1.99 19.5 20.3

AXSB Buy 538 20.3 37.5 44.0 14.4 12.2 219 255 2.46 2.11 1.79 1.75 18.4 18.5

KMB* Neutral 1,377 17.0 49.2 60.4 28.0 22.8 371 427 3.72 3.22 1.86 1.86 14.3 15.0

YES Buy 851 5.7 60.9 76.4 14.0 11.1 332 393 2.56 2.17 1.68 1.70 19.9 21.1

IIB Buy 857 7.3 43.2 54.6 19.8 15.7 227 274 3.77 3.13 1.90 1.97 20.7 21.8

DCBB Buy 119 0.5 7.3 9.5 16.5 12.6 63 72 1.90 1.65 1.12 1.17 12.3 14.1

FB Buy 129 1.8 13.0 15.6 9.9 8.3 100 112 1.29 1.15 1.20 1.19 13.7 14.7

JKBK Neutral 100 0.8 13.6 18.1 7.3 5.5 137 151 0.73 0.66 0.81 0.95 10.4 12.6

SIB Buy 25 0.5 3.7 4.7 6.8 5.4 29 33 0.86 0.77 0.78 0.86 13.3 15.2

Private Aggregate 123.6 17.2 14.3 2.78 2.41

SBIN (cons)* Buy 277 33.2 29.0 36.2 9.2 7.3 231 260 1.15 1.01 0.77 0.84 12.8 14.5

PNB Buy 160 4.6 26.8 36.2 6.0 4.4 231 263 0.69 0.61 0.77 0.91 12.2 14.6

BOI Neutral 218 2.3 50.3 64.3 4.3 3.4 455 511 0.48 0.43 0.46 0.49 11.6 13.3

BOB Neutral 179 1.2 24.1 30.8 7.5 5.8 184 208 0.97 0.86 0.70 0.78 13.7 15.7

UNBK Buy 153 1.6 36.6 47.1 4.2 3.2 320 359 0.48 0.43 0.57 0.64 12.0 13.9

INBK Buy 158 1.2 28.7 33.5 5.5 4.7 287 313 0.55 0.50 0.63 0.63 10.4 11.2

CRPBK Neutral 57 0.2 16.5 21.9 3.5 2.6 141 158 0.41 0.36 0.54 0.64 12.3 14.7

ANDB Buy 77 0.7 17.9 22.5 4.3 3.4 169 185 0.46 0.42 0.55 0.60 11.0 12.7

IDBI Neutral 79 2.0 14.4 19.7 5.4 4.0 157 173 0.50 0.45 0.58 0.69 9.5 11.9

DBNK Neutral 50 0.4 9.7 13.6 5.2 3.7 130 141 0.39 0.36 0.36 0.44 7.7 10.0

Public Aggregate 47.4 7.7 6.0 0.83 0.75

HDFC* Buy 1,276 31.9 38 46 21.6 16.4 165 192 5.03 3.93 2.53 2.53 23.8 24.9 LICHF Buy 443 3.6 33 39 13.5 11.3 198 229 2.24 1.93 1.43 1.42 17.8 18.3 IHFL Buy 561 3.3 64 79 8.7 7.1 215 246 2.61 2.28 4.23 4.29 32.4 34.3

IDFC Buy 169 4.3 13 14 13.4 11.8 109 120 1.29 1.16 2.20 2.19 11.5 12.0

RECL Buy 323 5.1 66 75 4.9 4.3 300 358 1.08 0.90 3.50 3.36 24.2 22.8

POWF Buy 276 5.8 55 63 5.0 4.4 288 334 0.96 0.83 3.18 3.11 20.6 20.1

SHTF Buy 1,031 3.8 78 92 13.2 11.3 494 573 2.09 1.80 2.27 2.44 16.3 17.7

MMFS Neutral 281 2.5 18 21 16.0 13.1 113 128 2.49 2.19 2.61 2.76 16.5 17.7

BAF Buy 4,281 3.4 219 267 19.5 16.1 1,137 1,360 3.77 3.15 2.94 2.88 21.0 21.4

NBFC Aggregate 63.8 14.8 12.8 2.74 2.38

*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries

23 April 2015 13

HDFC Bank

Financials and valuations

Income Statement (INR Million) Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E

Interest Income 203,808 278,742 350,649 411,355 484,699 592,737 724,585 898,368

Interest Expense 93,851 149,896 192,538 226,529 260,742 309,903 374,621 460,780

Net Interest Income 109,957 128,846 158,111 184,826 223,957 282,834 349,964 437,588

Change (%) 26.7 17.2 22.7 16.9 21.2 26.3 23.7 25.0

Non Interest Income 49,452 57,836 68,526 79,196 89,963 101,373 116,979 135,297

Net Income 159,409 186,682 226,637 264,023 313,920 384,207 466,943 572,885

Change (%) 20.3 17.1 21.4 16.5 18.9 22.4 21.5 22.7

Operating Expenses 77,800 92,776 112,361 120,422 139,876 165,053 197,503 236,337

Pre Provision Profits 81,609 93,906 114,276 143,601 174,045 219,154 269,440 336,548

Change (%) 20.4 15.1 21.7 25.7 21.2 25.9 22.9 24.9

Provisions (excl tax) 23,422 18,774 16,770 15,880 20,758 26,070 28,025 35,532

PBT 58,187 75,132 97,506 127,721 153,287 193,084 241,415 301,017

Tax 18,923 23,461 30,249 42,937 51,128 64,683 80,874 100,841

Tax Rate (%) 32.5 31.2 31.0 33.6 33.4 33.5 33.5 33.5

PAT 39,264 51,671 67,257 84,784 102,159 128,401 160,541 200,176

Change (%) 33.2 31.6 30.2 26.1 20.5 25.7 25.0 24.7

Equity Dividend (Incl tax) 8,948 11,749 15,360 19,275 23,803 29,917 37,406 46,641

Core PPP* 68,179 79,428 97,607 122,227 149,922 193,797 242,107 306,979

Change (%) 30.7 16.5 22.9 25.2 22.7 29.3 24.9 26.8 *Core PPP is (NII+Fee income-Opex)

Balance Sheet (INR Million)

Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E

Equity Share Capital 4,652 4,693 4,759 4,798 5,013 5,013 5,013 5,013

Reserves & Surplus 249,140 294,553 357,383 429,988 615,081 713,565 836,699 990,234

Net Worth 253,793 299,247 362,141 434,786 620,094 718,578 841,712 995,247

Deposits 2,085,864 2,467,064 2,962,470 3,673,375 4,507,957 5,499,707 6,819,637 8,456,349

Change (%) 24.6 18.3 20.1 24.0 22.7 22.0 24.0 24.0

of which CASA Dep 1,099,083 1,194,059 1,405,215 1,646,214 1,984,920 2,421,602 3,027,003 3,783,754

Change (%) 26.2 8.6 17.7 17.2 20.6 22.0 25.0 25.0

Borrowings 143,941 238,465 330,066 394,390 452,136 523,562 612,045 721,788

Other Liabilities & Prov. 289,929 374,319 348,642 413,444 324,844 394,400 492,879 615,977

Total Liabilities 2,773,526 3,379,095 4,003,319 4,915,995 5,905,031 7,136,247 8,766,273 10,789,362

Current Assets 296,688 209,377 272,802 395,836 363,315 424,713 510,648 627,526

Investments 709,294 974,829 1,116,136 1,209,511 1,664,600 1,914,290 2,297,147 2,756,577

Change (%) 21.0 37.4 14.5 8.4 37.6 15.0 20.0 20.0

Loans 1,599,827 1,954,200 2,397,206 3,030,003 3,654,950 4,532,138 5,665,173 7,081,466

Change (%) 27.1 22.2 22.7 26.4 20.6 24.0 25.0 25.0

Fixed Assets 21,706 23,472 27,031 29,399 31,217 35,967 41,251 46,535

Other Assets 146,011 217,216 190,144 251,246 190,949 229,139 252,053 277,258

Total Assets 2,773,526 3,379,095 4,003,319 4,915,995 5,905,031 7,136,247 8,766,273 10,789,362 Asset Quality (%) GNPA (INR m) 16,943 19,994 23,346 29,893 34,393 43,264 55,042 69,817

NNPA (INR m) 2,964 3,523 4,690 8,200 12,957 12,266 13,552 11,459

GNPA Ratio 1.0 1.0 1.0 1.0 0.9 0.9 1.0 1.0

NNPA Ratio 0.2 0.2 0.2 0.3 0.4 0.3 0.2 0.2

PCR (Excl Tech. write off) 82.5 82.4 79.9 72.6 62.3 71.6 75.4 83.6

E: MOSL Estimates

23 April 2015 14

HDFC Bank

Financials and valuations

Ratios

Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E

Spreads Analysis (%)

Avg. Yield-Earning Assets 9.4 10.4 10.6 10.3 9.9 9.9 9.8 9.8

Avg. Yield on loans 10.9 11.9 12.3 11.7 11.1 11.1 11.0 11.0

Avg. Yield on Invt 7.2 7.7 7.5 7.8 7.4 7.4 7.4 7.4

Avg. Cost-Int. Bear. Liab. 4.7 6.1 6.4 6.2 5.8 5.6 5.6 5.5

Avg. Cost of Deposits 4.3 5.6 6.0 5.7 5.5 5.2 5.1 5.1

Interest Spread 4.7 4.4 4.2 4.1 4.1 4.2 4.2 4.3

Net Interest Margin 5.1 4.8 4.8 4.6 4.6 4.7 4.7 4.8

Profitability Ratios (%)

RoE 16.7 18.7 20.3 21.3 19.4 19.2 20.6 21.8

RoA 1.6 1.7 1.8 1.9 1.9 2.0 2.0 2.0

Int. Expense/Int.Income 46.0 53.8 54.9 55.1 53.8 52.3 51.7 51.3

Fee Income/Net Income 27.5 29.3 27.3 27.2 24.2 22.8 22.0 21.1

Non Int. Inc./Net Income 31.0 31.0 30.2 30.0 28.7 26.4 25.1 23.6

Efficiency Ratios (%)

Cost/Income* 48.6 49.2 49.9 45.8 47.0 45.0 44.1 42.8

Empl. Cost/Op. Exps. 36.5 36.6 35.3 34.7 34.0 34.0 33.8 33.6

Busi. per Empl. (INR m) 61.5 66.5 72.4 87.9 106.7 125.2 148.8 178.1 NP per Empl. (INR lac) 0.7 0.8 1.0 1.2 1.5 1.8 2.1 2.5 * ex treasury

Asset-Liability Profile (%)

Loans/Deposit 76.7 79.2 80.9 82.5 81.1 82.4 83.1 83.7

CASA Ratio 52.7 48.4 47.4 44.8 44.0 44.0 44.4 44.7

Investment/Deposit 34.0 39.5 37.7 32.9 36.9 34.8 33.7 32.6

CAR 16.2 16.5 16.8 16.1 17.6 16.4 15.1 14.0

Tier 1 12.2 11.6 11.1 11.8 14.0 13.3 12.6 11.9 Valuation

Book Value (INR) 109.1 127.4 152.1 181.3 247.4 286.7 335.8 397.1

Change (%) 16.0 16.8 19.4 19.2 36.5 15.9 17.1 18.2

Price-BV (x) 9.3 8.0 6.7 5.6 4.1 3.5 3.0 2.6

Adjusted BV (INR) 108.2 126.4 150.7 178.9 243.8 283.3 332.1 393.9

Price-ABV (x) 9.4 8.0 6.7 5.7 4.2 3.6 3.1 2.6

EPS (INR) 16.9 22.0 28.3 35.3 40.8 51.2 64.0 79.9

Change (%) 31.0 30.4 28.4 25.0 15.3 25.7 25.0 24.7

Price-Earnings (x) 60.1 46.1 35.9 28.7 24.9 19.8 15.8 12.7

Dividend Per Sh (INR) 3.3 4.3 5.5 6.9 8.2 10.2 12.8 16.0

Dividend Yield (%) 0.3 0.4 0.5 0.7 0.8 1.0 1.3 1.6 E: MOSL Estimates

23 April 2015 15

HDFC Bank

Corporate profile: HDFC Bank

Exhibit 21: Shareholding pattern (%) Mar-15 Dec-14 Mar-14

Promoter 21.7 22.5 22.6

DII 9.7 10.0 9.9

FII 51.4 50.6 51.1

Others 17.2 16.9 16.4

Note: FII Includes depository receipts

Exhibit 22: Top holders Holder Name % Holding

Europacific Growth Fund 3.8

LIC of India 2.6

ICICI Prudential Life Insurance Company Ltd 1.6

ICICI Prudential Focused Bluechip Equity Fund 1.2

Government of Singapore 1.2

Exhibit 23: Top management Name Designation

Aditya Puri Managing Director

Paresh Sukthankar Deputy Managing Director

Sashidhar Jagdishan CFO

Exhibit 24: Directors Name Name

Shyamala Gopinath Renu Karnad

Aditya Puri Bobby Parikh*

Paresh Sukthankar Pandit Palande*

A N Roy* Partho S Datta*

Keki Mistry Kaizad Bharucha

*Independent

Exhibit 25: Auditors

Name Type

BSR & Co LLP Statutory

Exhibit 26: MOSL forecast v/s consensus EPS

(INR) MOSL

forecast Consensus

forecast Variation

(%)

FY16 51.2 51.8 -1.1 FY17 64.0 63.5 0.8 FY18 79.9 72.7 9.9

Company description HDFC Bank amongst the ten private sector bank which were awarded license post liberalization of 1990s. The bank was incorporated in August 1994 and is promoted by the biggest mortgage lender in the country, HDFC Limited (21.6% stake). The bank is now the second largest private sector bank in India with asset size of ~INR6t and market share of ~5% in deposit and loans respectively. As on March 31, 2015, the bank had a network of 4,014 branches and 11,766 ATMs spread across 2,464 cities/towns in the country.

Exhibit 20: Sensex rebased

23 April 2015 16

HDFC Bank

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