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Event update: HDFC Bank (Outperformer) - Analyst day – Renewed rural push

Key takeaways from the HDFC Bank analyst day:

Renewed focus on branch expansion with declining CI ratio: After going a bit easy on branch expansion in the last 3 years, the bank plans to ramp up branch expansion specially in the rural and semi-urban areas. Against 316 branches added in FY19 and 72 in FY18, the bank now plans to add 600 branches p.a. for 5 years. This will help collect low-cost, stable deposits from the interiors and give a boost to granular loan growth. Even with the aggressive branch expansion, the bank expects the CI ratio to be on a declining trajectory as the revenue generation will outweigh costs. The bank plans to achieve CI ratio of 35% in 5 years. A rural push will help lower the CD ratio which is currently high at 89%  as the CD ratio is lower in rural areas.

Expanding the use of the Virtual Relationship Model: The bank currently services 6M customers through VRM and plans to use this channel effectively to enhance customer engagement. Around 3M clients are serviced by traditional RMs. Against 200 customers covered by a physical RM, a virtual RM handles 1300 -1400 accounts. The plan is to increase clients serviced by RMs to 20M from 9M currently over the next 4-5 years..

Leveraging CSCs to acquire rural customers: The bank has partnered with the government to provide digitally-assisted basic services (helping with the issuance of birth certificates, aadhar cards) in villages/small towns through CSCs (common service centres). The CSCs are funded by village level entrepreneurs. The bank can leverage the CSCs to on board rural customers without any infrastructure or manpower costs. The CSCs have a wide distribution reach of 300,000 centres.

Search committee six months before CEO’s retirement: If there is no clarity on whether the RBI will extend CEO retirement age to 75yrs,  the bank will set up a search committee to screen internal and external candidates six months before Mr Puri’s term ends. Mr Puri is due to retire in October 2020. Mr Puri will complete the entire handover to his successor in a month’s time.

Macro: Mr Puri is optimistic about economic growth. He expects risk weights on consumer loans to be lowered. The bank remains cautious on the car loan segment. 305 dealerships have closed in the last 18 months and the inventory levels are high at 60 days. Uberization has caused a structural decline in car demand.

We reiterate Overweight on HDFC Bank. With a well-formulated business plan, the bank will likely maintain its leadership across products and its strong profitability.  As such we expect the stock to maintain its premium to the sector. HDB Financial Services continues to deliver strong growth.