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Annual report analysis – Raising the bar higher; embarking on project ‘Future Ready’

Demonstrating responsible leadership (theme for FY20 annual report), HDFC Bank’s FY21 annual report highlights how it is cruising ahead despite headwinds, driving aspirations of inclusive growth and catalysing the next wave of transformation. It humbly accepts technology, besides strength, also as an area of improvement and is embarking on scale changing technology adoption and transformation agenda to drive ambitious growth plan. The aim is to keep the system always ON, SECURE and PERFORM at SCALE. It has also unveiled project ‘Future Ready’ to add strength to its strategic and execution muscle. It includes: 1) Identifying growth engines (created new business segments of MSME and rural banking), 2) adding digital marketing as another key delivery channel, 3) expanding semi-urban and rural markets, 4) creating a new digital factory to foster innovation, and 5) putting in place the right talent and further strengthen its core functions to drive project ‘Future Ready’. This, coupled with superior metrics, granularisation of deposits, improving RWA profile, capital buffer (tier-1 of 17%), cost efficiency and 60bps precautionary buffer, reinforces confidence in its resilience. Maintain BUY with an unchanged target price of Rs1,818.

‘Run and Build the Bank’ of the future:

The bank is building on its execution muscle by creating future growth engines focusing on business verticals (MSME, rural banking, semi-urban/rural markets etc) and delivery channels (digital marketing along with branches and VRMs), with digital technology being the driving force. It will ‘Run and Build the Bank’ of the future with vision to make HDFC Bank the most preferred ‘un-bank’ experience for new India.

Building new competencies is a key pillar of digitisation strategy:

The Bank has taken regulatory intervention on technology outage issues as an opportunity to improve and redouble its efforts to fix this problem for good. Third party audit of the Bank’s IT systems is now over and the report has been submitted to the regulator. It now awaits the decision from the RBI. It has adopted a three-dimensional approach to building new competencies through digital factory, enterprise factory and enterprise IT, and encompassing targeted efforts to gain new skills, new technologies and new ways of working. It has now embarked on a scale changing technology adoption and transformation agenda to help drive ambitious future growth plans. Specific initiatives include: Infrastructure scalability, Disaster Recovery (DR) resiliency, Security Enhancements and Enhanced Monitoring Mechanisms.

Incremental financial data points from annual report:

1) Granularisation of deposits (proportion of top 20 depositors coming down to as low as 4%), 2) top 20 borrower concentration has further inched up to 13% as growth was led by large corporate segment, 3) incremental lending is in favour of public sector entities, 4) MSME lending crosses Rs2tn mark – a part of future growth engine.

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