MOSL: HDFC BANK (Buy)-The juggernaut

HDFC Bank: The juggernaut

(HDFCB IN, Mkt Cap USD77.9b, CMP INR1872, TP INR2400, 28% Upside, Buy)

HDFC Bank (HDFCBK) 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. We expect 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.