FREE

Event update: HDFC Bank (Outperformer) - Analyst meet – Strong growth to continue, focus on succession planning

HDFC Bank hosted its annual analyst meet where the bank showcased the breadth of its management team, its sound succession planning, the huge progress in its digital platform, its sound lending infrastructure, strong risk management and robust performance of its subsidiaries. We reiterate our Outperform on HDFC Bank with a target price of Rs2,515 . We see the strong momentum in retail lending sustaining while corporate lending has thrown up new opportunities with state banks vacating the space and opportunities to lend to the new promoters for NCLT companies. The strong digital push will ensure that the bank can compete effectively not only with other banks and NBFCs but also with other fintech companies and payment/commerce platforms.

Focus on succession planning: The bank has worked hard on changing the structure of its management team. The focus has been to create a strong second and third line of management and diffuse the decision making process for faster turnaround times and also for business continuity. The bank will appoint a search committee to find a successor to Mr Puri eighteen months before his retirement slated for October 31, 2020. Both internal and external candidates will be considered. Among the private banks we cover, we believe no other bank has done succession planning as well as HDFC Bank.

Listing of HDB and approval for the bank’s equity issue: While HDB Financials has sufficient capital and its CEO announced that there are no immediate listing plans, we sensed from our informal discussion that it could list in the next 12-18 months. The grey market value of HDB suggests a market cap of US$11.5-12bn. The bank has not yet received approval for its equity issue from the FinMin which it had applied for in December. According to a new regulation, companies which belong to sectors where there are FDI caps need approval for any foreign investment above Rs50bn. It is not clear whether the approval is being delayed because HDFC Bank’s foreign holding is close to its limit, but we believe the approval will come soon as it does not require change in existing limits or framework.

Bigger than Bajaj Fin in 18 mths: HDFC Bank has been focussing on growing its consumer durable portfolio through its credit card for consumer finance and presence at dealer points. They have not quantified the size of the portfolio. The objective is to become bigger than Bajaj Finance in consumer durable financing in 18 months.

Clarity on home loans by end of 1Q19: HDBK has stopped buying housing loans from HDFC through the assignment route as they are seeking legal opinion to ensure that only the fees paid to HDFC come under the service tax net not the interest they receive on these loans. The matter should be sorted out in 1Q. This lack of clarity is not HDBK specific and applies to all lenders who do assignments. HDFC group has strong risk management practices so it has sought legal opinions on the issue. There are some lenders who have continued with assignments even without obtaining clarity.

Amazon, Google, apple pay are competitive threats: The CEO highlighted again that Amazon, Google and Apple Pay could emerge as tough competitors. The bank will continue to build on its digital strength and focus on customer service to counter competition.

Consumer lending is still under penetrated: While HDFC Bank’s key lending segment, consumer lending has grown rapidly for HDFC Bank and the sector, management believes that it remains underpenetrated 1) Incremental jobs are still coming up 2) Spending patterns are changing with millennials now using leverage to buy assets at the age of 27-28 versus the older generation where the average age of a retail borrower is 40 plus. 3) HDFC Bank’s own deposit base is not fully penetrated and huge cross sell opportunities exist. The cross sell and new account additions are nowhere close to their peak. 4) GST and demonetization have brought hidden wealth into official channels which has not only helped retail liabilities but also retail lending

Digital push will ensure that the cost to income ratio keeps coming down: HDFC Bank will continue to reap the benefits of its strong investment in its digital platform in the form of lower cost to income ratios. Cost to income ratio will continue to fall.

New customer adds: The bank adds 0.5M new to bank customers every month.

Share of self-employed customers increasing: In incremental business there is an equal split between self-employed and salaried against a higher proportion of salaried in outstanding business

Big MFI portfolio: Livelihood loans at Rs500bn are 1% of total loans but use 10% of the employees. HDFC Bank has financed 8-9 million families.

Asset quality will remain volatile in agri: Management highlighted that agri is a tough business and asset quality will remain volatile depending on climatic and political conditions. However the bank plans to continue with direct agri lending because the penalty for not meeting agri targets in the form of investing in RIDF bonds is a yield loss of 4%.