Focus on next stage of digital transformation – HDFC Bank

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended in its 5 day winning streak and closed at 16,663 (-1.2%). Among the sectoral indices, AUTO (+0.6%), and FMCG (+0.2%) were the only gainers while METAL (-4.1%), IT (-2.6%), and OIL & GAS (-2.5%) were the top sectoral indices that closed in the red. Among the NIFTY50 stocks, TATACONSUM (+3.7%), M&M (+2.4%), and CIPLA (+2.0%) led the gainers while TATASTEEL (-5.2%), HINDALCO (-5.2%), and ONGC (-4.9%) led the losers.

Excerpts of an interview with Mr. Parag Rao, Country Head, HDFC Bank published in Economic Times on 14th March 2022:

  • The bank did face a couple of outages and it impacted the customers. The regulator took notice of this and conveyed that it has no issues with the bank’s growth plans and strategic direction in which the bank is going, but it would like it if the bank reconsiders its investments in infrastructure so that it can sustain this growth.
  • The bank in the interim was not allowed to do two things. One was the credit card ban; it could not issue new credit cards to customers and at the same time, all the new digital initiatives which the bank was planning to launch were put on temporary hold till such time the bank strengthened and demonstrated the capability to manage this kind of growth.
  • The bank’s new motto is technology become the driver and magnet to get business for the bank and that is how it has started the transformation. In this context, the first embargo on the issuance of credit cards was lifted in August-21. Since then, the bank has gotten back to its regular run rates and rapid growth plans on its credit card base.
  • HDFC Bank is a very large bank. It has commitments and responsibility to a very large customer franchise and in that sense, this pause in its growth was for a very good cause and it is now far better prepared for the next five years.
  • The bank’s strategy can be broken up into three core parts; one is reimagining the entire customer experience and building new digital platforms which would take the customer experience that much far into the future. The context has already been set over the last five to seven years with the emergence and explosion of the digital wave.
  • This digital wave has brought about significant changes in the way customers would interact with their principles, banks, and various other categories practically in every industry and so there was a different need for customers in this whole digital world.
  • All of this has expanded the kind of needs and demands that the customer expects from the institution. So reimagining customer experience and building completely new digital platforms to enhance customer value is one leg of the bank’s strategy.
  • One immediate change over the next couple of months will be the relaunch of PayZapp 2.0 on a completely new platform. The Bank aims is to be among the top three payment apps in the country and a significant ramp-up for PayZapp not just by how it engages and provides the services of holistic payments to its existing set of 60 million customers.
  • The Bank’s planned investments into technology are expected to double over the next 3 years as compared to the past 3 years. The bank is focused on expanding its digital infrastructure by bringing new and skilled talent to lead the transformation.

Asset Multiplier Comments

  • After 16 months of restrictions imposed by the RBI, HDFC Bank is all set to leverage its investments in technology to fuel the next stage of growth in customers by expanding its omnichannel presence.
  • While HDFC Bank is a leader in a lot of parameters in the banking sector, it requires significant catch-up to its peers like ICICI Bank and SBI who have already ahead of the curve when it comes to customer acquisition and tech-based infrastructure development.

Consensus Estimate: (Source: Marketscreener website)

  • The closing price of HDFC Bank was ₹ 1424 /- as of 15-March-2022. It traded at 2.7x/ 2.4x the consensus Book Value per share estimate of ₹ 520/600 for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1970/- implies a P/B multiple of 3.3x on FY24E BVPS estimate of ₹ 600/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Bank to see a greater expansion in rural areas – HDFC bank

Update on the Indian Equity Market:

On Tuesday, NIFTY ended lower at 17,362 (-0.1%) as it closed 40 points below the opening level of 17,402. Among the sectoral indices, CONSUMER DURABLES (+1.0%), FMCG (+0.3%), and FINANCIAL SERVICES (+0.2%) ended higher, whereas REALTY (-2.3%), IT (-1.3%), and PSU BANK (-1.3%) ended lower. Among the stocks, BHARTIARTL (+2.6%), HDFC (+2.5%), and GRASIM (+1.6%) led the gainers while SUNPHARMA (-2.2%), BPCL (-1.8%), and HINDALCO (-1.8%) led the losers.

Excerpts of an interview with Mr. Rahul Shukla, Group Head, Commercial & Rural Banking, of HDFC Bank (HDFCBANK) with Economic Times on 6th September 2021:

  • The reality is very different from what is spoken about in TV newsrooms. The commercial vehicle and construction equipment business is strong, credit utilisation by MSMEs is steadily increasing every month, the healthcare sector is fairly credit-strong.
  • The bank continues to expand its geographic footprint, extending credit in rural and semi-urban areas of the country, and sees no credit challenges in finding new business.
  • The bank is active in transportation finance, where it finances trucks, construction equipment, and tractors. The disbursements in July were 40% higher than in June, and in August, were 20-25% higher than in July.
  • The bank operates in 100,000 villages and in two years, it may expand to 200,000 villages. Even if it’s a huge jump, it is still only 30% of the market. The bank has a robust digital platform which has helped it to add new customers.
  • Rural lending today is about 90% crop-based lending. Crop-based lending is largely related to the price of dal and sugarcane. As the ecosystem is completely changing, there is a lot of push in vegetables, fruits, poultry, piggery, etc. which accounts for 60-65% of the crop-based lending.

Asset Multiplier Comments

  • Banks were willing to lend to the rural population during the 1st covid wave period as they were not as much affected as urban areas. The rural population was largely affected during the 2nd covid wave, and it is still recovering from the impact. Therefore, the dynamics related to lending may be different going forward.
  • HDFC Bank has seen a reduction in interest expenses and other operating expenses over the last 5 years. This trend is likely to continue in the upcoming years as the bank continues to manage its deposits and borrowings well. With reducing provisions led by an increase in NPA recoveries, the bank’s increasing geographic footprint, and well-balanced CASA deposits, we expect the bank’s prospects to improve further.

Consensus Estimate: (Source: market screener website and website)

  • The closing price of HDFCBANK was ₹ 1,570/- as of 07-Sept-2021. It traded at 3.7x/3.2x/2.7x the consensus book value estimate of ₹ 423/488/574 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,760/- implies a PB multiple of 3.1x on FY24E BVPS of ₹ 574/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Bottom of pyramid businesses & SMEs are not highly leveraged, says Aditya Puri, HDFC Bank

Update on the Indian Equity Market:

On Tuesday, NIFTY ended up 190 pts up (+2.5%) at above 7,800 level amid Finance Minister Nirmala Sitharaman announcements to move tax deadlines and ease of rules to fight Coronavirus.

Among the sectoral indices, IT (6.1%), FMCG (3.2%) and PHARMA (2. 8%) were among the top gainers while REALTY (-2.0%) was the only sector to close lower. INFY (+14.0%), ADANIPORTS (+13.8%) and BRITANNIA (+11.8%) were the top gainers. M&M (-8.0%), GRASIM (-7.7%) and IndusInd Bank (-6.8%) were the top losers.

Bottom of pyramid businesses & SMEs are not highly leveraged, says Aditya Puri, HDFC Bank

Edited excerpts of an interview with Mr Aditya Puri, Managing Director & Chief Executive Officer of HDFC Bank; dated 23rd March 2020:

  • His views on COVID-19 – He is happy with the lockdown and suggested that we should control this situation and work towards decreasing the number of cases, this will be the best thing that can happen to everyone now.
  • When asked about where he sees the financial market and economy going ahead, he commented that in such crisis financial backing is needed looking at the difficulty we will be going through. A non-schedule rate cut is necessary for both to keep the yields in check as well as to give a clear message to the market that we are willing to go to whatever stake necessary. A forbearance for the cash flow problem that the virus will create is needed as it is not that the companies are going bad, there could be cash flow mismatches and the more liquidity provided will make sure that life after the virus is better.
  • While giving a picture about his bank he said that if the companies survive, the country will survive and the banks will also survive. HDFC Bank has been working on this. They are sitting on the liquidity of USD 5 bn and their total portfolio is rated AAA at an internal risk rating of 4.3. HDFC Bank has lent most of their wholesale to 80% to AAA companies. On the PL side, they have lent to the same fellows for salary and he expects salary cuts. 75-80% of personal loans and credit cards are to the same salaried employees there. It is difficult for the Bank to take a call before laying off starts but he expects salary cuts for sure before that.
  • He stated that as far as SME portfolio is concerned compared to the others, 80% of the portfolio has got additional collateral and they have a self-funding ratio in SME of 85%. He also said that he is more concerned with the health aspect than being concerned about the bank.
  • He further added that their bottom of the pyramid on the businesses is not highly leveraged, so when they went to the ground for the shopkeepers, they are not highly leveraged. A large part of SMEs also is not highly leveraged.
  • Talking about rural India he said that it is functioning in its own world. The only thing we have to do is stop people going back there and spreading. People there have the money and the demand is coming from rural areas.
  • With regards to earnings, he said that there will not be a flat quarter or a drop in profit and investors would be surprised with the numbers. He will also create a corona reserve and come out still okay.
  • On the work from the home structure, he said that ~33% of their people are working from home now and he sees no reason why they shouldn’t continue after corona which gives a further drop in our costs. So, their cost to revenue ratio is going down. HDFC Bank has substantially increased their distribution, they have the technology and USD 5 bn of liquidity and it is still coming in.

Consensus Estimate: (Source: market screener, websites)

  • The closing price HDFC Bank was ₹ 774/- as of 23rd March 2020. It traded at 2.5x/ 2.1x/ 1.8x the consensus book value estimate of ₹ 311/ 360/ 420 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price of ₹ 1445/- implies a PBV multiple of 3.4x on FY22E EPS of ₹ 420/-

HDFC Bank (HDFCBANK): Bank to cash on the festive demand

Update on the Indian market

On Monday, NIFTY continued the rally for the second consecutive trading day after Friday’s announcements of tax measures and revisions in GST rates leading to earnings upgrade of the companies. NIFTY closed 2.9% higher. The sectoral indices’ performance reflected the key beneficiaries of the change in tax rates with NIFTY BANK (+5.4%), NIFTY Financial services (+5.4%) and FMCG (+4.4%) were the biggest gainers while NIFTY IT (-2.9%) and NIFTY Pharma (-2.2%) were the losers. The biggest gainers were BPCL (+13.7%), LT (+9.1%), BAJFINANCE (+9%), EICHERMOT (+9%) while the highest losers were ZEEL (-8%), INFY (-5%).

HDFC Bank (HDFCBANK): Bank to cash on the festive demand

Key takeaways from the interview of Mr Aditya Puri, MD, HDFC Bank; dated 19th September 2019 on CNBC TV 18:

  • HDFC bank has made higher provision for Agri loans but the actual defaults are not high. Agri loan slippages were one-off and will come down post-harvest.
  • HDFC bank created contingency provisions as per RBI norms for NBFCs and for corporates which don’t have unhedged exposure. These provisions are expected to go away this quarter.
  • The cost to income ratio is expected to go down by 5% in the next 5 years for HDFC bank.
  •  Banks are not allowed to lend for land. In the real estate sector, commercial real estate is doing well. The middle, slightly above middle and affordable housing continues to see demand. The concessions announced by the finance minister of India are only for affordable houses. The Luxury flats, are the ones which will not benefit and the prices will eventually be determined by the market.
  •  HDFC Bank is looking ahead to a very good festive season of Diwali. From 27th September 2019 to 31st December 2019; HDFC Bank is coming up with a Diwali Dhamaka offer which will provide lower cost, cashback and discount from the vendor to the customers. HDFC Bank will give ~7-10% cashback over and above the discounts given by the vendor partners. HDFC Bank will maintain NIMS of ~4.3%.
  • On talking about the linking to external benchmark rates, Mr Puri mentioned that HDFC bank doesn’t have many floating loans. He mentioned that floating rate deposits are not feasible. There is a lot of pressure on banks to transmit lower rates, but there is a need for the debt market reforms. 

Consensus Estimate (Source: market screener website)

  •  The closing price of HDFCBANK was Rs 1,255/- as of 23-September-19. It traded at 4.1x / 3.6x / 3.0x the consensus book value for FY20E/ FY21E/ FY22E of Rs 308/ 351/ 413 respectively.
  • Consensus target price of Rs 2,661/- implies a P/B multiple of 6.4x on the FY22E book value of Rs 413/-

HDFC Bank (HDFCBANK IN): Stable performance but higher provisions are worrisome

Dated: 22nd July 2019

1QFY20 Results

  • Net Interest Income (NII) increased 23% YoY to Rs 1,32,943 mn. The NII margins improved by 21 bps YoY to 4.4%.
  • Operating Profit before Provisions and Contingencies (PPOP) increased by 29% YoY to Rs 1,11,472 mn. The provisions other than tax increased 60% YoY to Rs 26,137 mn which included specific loan loss provisions of Rs 24,135 mn (+69% YoY).
  • Reported PAT grew by 21% YoY to Rs 55,682 mn.
  • The advances grew by 17% YoY to Rs 82,97,298 mn driven by 20% YoY growth in the corporate & other loans to Rs 38,16,757 mn. The retail loans increased by 15% YoY to Rs 44,80,541 mn. The domestic loan mix between retail: wholesale stood at 54:46.
  • The asset quality as of 30th June 2019 deteriorated with GNPAs at 1.4% (v/s 1.36% as of 31st March 2019) and NNPAs at 0.43% (v/s 0.39% as of 31st March 2019).
  • HDFC Bank reported 18% YoY growth in deposits with 13% YoY growth in CASA to Rs 37,90,010 mn and 23% YoY growth in term deposits to Rs 57,55,530 mn.

Management Commentary

  • The Capital Adequacy ratio as of 30th June 2019 stood at ~16.9%; as against the regulatory requirement of ~11%.
  • Total provisions (comprising specific provisions, general provisions and floating provisions) were ~115% of the gross NPAs as of 30th June 2019 v/s 117% as of 31st March 2019. The Bank held floating provisions of Rs 14,510 mn as of 30th June 2019.
  • GNPAs ex-Agri stood at 1.17% as of 30th June 2019 v/s 1.09% as of 30th June 2018.
  • The Board of Directors has declared a special interim dividend of Rs 5 per equity share of Rs 2 to commemorate 25 years of the Bank’s operations.

Consensus Estimate (Source: market screener website)

  • The closing price of HDFC Bank is Rs 2,303/- on 22-Jul-19. It traded at 3.5x / 3.1x the consensus book value for FY20E /21E of Rs 650/ 751 respectively.
  • Consensus target price of Rs 2,717/- implies a P/B of 3.6 x on the FY21E book value of Rs 751/-.