Returning to normalcy; growth outlook improving
* HDFC has reported PAT of Rs28.7bn (down 27.6% yoy/5.9% qoq), backed by a steady operating performance and low provisioning. Adjusting for one-off gains, PAT grew ~8.2% yoy (+41% qoq). The company managed to hold spreads at 227bps (flat sequentially), indicating softening in the cost of funds being passed on to end customers.
* AUM grew ~11.3% yoy (+2% qoq) to Rs4.75tn in Q2, mainly aided by healthy demand for individual housing and steady trends in balance transfers due to a steep decline in lending rates. Management has indicated a strong revival in demand during Sep/Oct’20, however, the sustainability of such demand remains crucial.
* HDFC has reported a strong improvement in collection efficiency at 96.3% for Sep’20 (post moratorium). Our discussion with management suggests further improvement in efficiency, including the previous month dues. Most customers under the moratorium have opted for the tenure extension and have started paying regularly after the moratorium ended.
* HDFC remains our top pick in the NBFC/HFC space due to a relatively longer asset maturity duration (supporting AUM growth), superior liability franchise and lower default risk. We raise FY22/23E earnings by ~5.7%/~4%. Retain Buy (OW in EAP) with a revised TP of Rs2320, ~2x P/B Mar’23 (Standalone).
What we like about HDFC results
* We believe that the company is able to gain the market share, especially from other HFCs and even smaller banks, due to its superior liability franchise providing it an advantage on the cost of fund.
* NIM witnessed a sequential improvement at 3.3% from 3.1% as the company has gradually unwound its high liquidity levels seen in the previous quarter.
* Actual provisions as of Sep’20 stood at Rs123bn, equivalent to 2.6% of exposure of default, which provides further comfort. HDFC carries Covid-19-specific provisions of Rs12bn.
Where we remain concerned
* The major demand revival is expected through balance transfers, which is not a sustainable source. We would await for a further clarity and data points over the actual rise in demand for real estate in the coming quarters,
* Any adversities caused by the pandemic would be a key factor to watch out for
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