A research by Motilal Oswal released today, said that the HDFC Bank 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. Motilal Oswal research expects 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 INR240b). We maintain our Buy rating with a target price of INR2,400.
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. SME loan growth has also received a boost from digitization of the application process, which has reduced the turnaround time (TAT). 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. The bank has 50%+ market share in the credit card business; it targets to double its outstanding card base over the next three years.
Subsidiaries rapidly gaining scale; expected to add ~4.3% to valuations Both HDB Financials and HDFC Securities have grown robustly over the last three years. While HDB Financials reached AUM of INR352b by 1QFY18 (comparable to CIFC), HDFC Securities recorded ~40% PAT CAGR over FY14-17, with its RoE improving to a healthy level of 29%+ from 22% in FY16. We expect both the subsidiaries to maintain strong growth trajectory over the next few years.
At 25x FY20E earnings for HDFC Securities and 3.5x FY20E BV for HDB Financials, the two subsidiaries together would add INR103 to our TP, post hold-co discount of 20%.
Improvement in RoRWA underscores adequate pricing of risk; asset quality risks well in control. Owing to stronger growth in the unsecured portfolio, the bank’s RWA has steadily increased to 79% of total assets, indicating an increase in the risk profile. However, we note that besides the improvement in RoA (40bp improvement over FY11-18), the RoRWA of the bank has improved by ~30bp to ~2.5% during the same period.
This indicates that – (i) profitability has improved on the back of multiple levers (higher fee income and lower opex) rather than simply taking on higher balance sheet risk and (ii) the bank is able to adequately price the incremental risk it is taking via robust growth in the unsecured portfolio. The delinquency trend in the unsecured portfolio also remains well in control, given that >60% of credit card loans and >50% of personal loans are disbursed to existing customers with a strong credit history. HDFCBK’s focus in extending these products largely to salaried customers also helps it in maintaining healthy asset quality.
