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FY22 Annual Report – focus on deeper presence and hungry for growth

HDFC Bank’s annual report for FY22 underscores the bank’s focus on increasing distribution presence (1,500-2,000 branches per year), consolidate its strengths in the payments space (long product rollout pipeline) and drive growth in the SME and commercial banking space (SME assets at INR 3trn+ growing >50% YoY).

The bank’s customer base has now grown at 10% CAGR over the past 5 years crossing the 70mn mark. However, stronger growth in wholesale banking (vs retail banking) over the past couple of years has also meant that concentration has marginally increased – top 20 borrowers now account 13.8% of loans, 14.4% of exposures vs 11.6%/12.0%, respectively in Mar’20. The bank also maintains that wholesale banking profitability does not compromise the bank’s overall bank RoAs (implying 2%+ RoA). For FY22, wholesale banking earnings grew +43% YoY while retail banking declined by 13% YoY. Liability franchise continues to grow from strength to strength with 22% YoY CASA growth and cost of deposits falling to a decadal low of 3.4% in FY22. Fee income – 23% is contributed by third party products and bank is the largest collector of direct taxes (FY21).

3Agri and MSME assets are now 10% and 23% of the overall loan book respectively and almost 84% of total branches now offer MSME products. However, HDFCB also witnessed significant jump in RIDF deposits in FY22 (now at 2.2% of assets) while it also bought PSLCs amounting to almost 8.9% of loans in FY22 reflective of the bank’s requirement to comply with PSL requirements. The bank continues to enjoy strong market share (28% in CV and 8% in LCV/ULCV) in vehicle financing and has further cemented its position over the past few years. The annual report also indicates multiple initiatives to strengthen the bank’s digital offering and product rollouts planned in the next 12 months

HDFC Bank continues to reiterate the medium-term upsides due to the merger – large cross sell opportunity (only ~2% of cust. overlap with HDFC). We believe valuation compression due to potential decline in RoEs on a post-merger basis has largely played out given that core bank is now trading at 2.0x FY24E P/BV vs 2.5x FY24E P/BV (pre-merger announcement). While meaningful upsides are contingent to sustainable uptick in NIMs, continued growth momentum across business lines and smooth integration of HDFC Ltd driving steady improvement in quality of earnings, we believe downside risks are minimal from current valuations given the strength of its liability franchise as well as its high quality asset book. We build merged financials in 2HFY24 with full compliance of CRR, SLR as well as impact of potential PSL requirements which results into lower EPS/RoE for FY24E than before. Our target price of INR 1,640 values HDFC Bank at 2.5x FY24E P/BV (on post-merger basis for sustainable RoEs of c.17% vs 19% earlier) with INR 154 for subsidiaries value. Maintain BUY.

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