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Healthy operating performance backed by consistent growth revival

* HDFC reported ~19% yoy growth in individual loans (adjusting for loans sold) as of FY21, with individual disbursements up ~42% yoy in H2FY21 post the gradual unlocking of the economy. Going forward, we remain optimistic about demand for individual housing amid lower interest rates, SOPs offered by state governments and competitive environment.

* NIMs remained stable at ~3.5% in Q4FY21, supported by steady spreads of ~229bps (flat sequentially). The company manages spreads on individual loans at ~193bps and on nonindividual book at ~322bps. Operational performance remained healthy with the cost-toincome ratio improving to ~7.7% vs. ~8.1% in Q3FY21.

* The annual spike in Stage 2 was due to recognition of accounts under ECLGS and onetime restructuring under Stage 2. Gross NPAs remained flat at ~1.98% of loans (~1.91% last quarter), with Individual loans contributing ~0.99% (0.98% last quarter) and nonindividual portfolio contributing ~4.77% (4.35% last quarter).

* HDFC remains our top pick, considering the surge in housing demand, HDFC’s ability to manage market share, superior liability franchise and healthy provision cover. We raise FY22E/23E earnings by ~6.2%/~7.3% and introduce FY24 estimates. We retain Buy (OW in EAP) with a revised TP of Rs3,140, based on ~2x P/B Mar’23E (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, as its superior liability franchise provides it an advantage on the cost of fund.

* The company maintains a heavy provision buffer of Rs130.2bn against the provision requirement of Rs54.9bn. The provisions carried as a percentage of the Exposure at Default (EAD) is equivalent to 2.62%.

* ~80% of incremental borrowings are done through deposits, which strengthens the company’s liquidity stability.

Where we remain concerned

* Our market share analysis suggests consistent market share loss by HFCs to banks, which we expect to intensify further. Though HDFC Limited still managed to hold its position due to superior reach and best-in-class liability franchise, the competition pressure in the housing segment is imminent.

* The sharp shift in Stage 2 assets to Stage 3 assets would be a concern; however, the provision buffer provides comfort.

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