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* HDFC 4QFY23 reported PAT grew 20% YoY to INR44.3b (13% beat), aided by a) NIM expansion and b) Higher assignment income. Core PPOP grew 16% YoY to INR53.4b.

* NIM expanded sequentially by ~10bp with FY23 NIM at 3.6% (v/s 3.5% as on 9MFY23). Credit costs increased ~4bp QoQ to ~29bp.

* Disbursements in the Individual segment were slightly below INR500b in 4QFY23. Individual/total AUM rose 17%/11% YoY, with Individual loans comprising ~83% of AUM.

* The management shared that it has not witnessed any perceptible change in demand for mortgages, despite the high interest rates and that a large proportion of customers have seen only their tenor increase rather than any EMI increase. HDFC achieved its highest ever monthly disbursements in Mar’23 and expects this positive momentum to continue throughout FY24. Commentary on the existing mortgage demand has been divergent across the different lenders in the mortgage ecosystem.

* HDFC continues to have a strong ‘right to win’ in its standalone Mortgage business. We reiterate our BUY rating on the stock with a TP of INR3,290 (premised on Mar’25E SoTP).

Effective management of transmission lag drives NIM expansion

* Effective Jul’22, HDFC had reduced the re-pricing frequency on freshly disbursed Retail loans to one month (from three-months earlier). However, on the back-book, one-third of the Retail book gets re-priced every month due to the quarterly reset.

* While the spreads were stable, the improvement in yields led to a sequential margin expansion of ~10bp with FY23 NIM at 3.6% (v/s 3.5% as on 9MFY23). With expectations of a near-end to the repo rate hike cycle, we expect margins to stabilize over the next three to six months.

Asset quality improves; restructured pool moderates sequentially

* Gross S2 + S3 (combined, 30+dpd) declined ~55bp QoQ to 5.0% (PQ: 5.6%). GS3 decreased 40bp QoQ to 1.4%. ECL/EAD declined ~25bp QoQ to ~2%.

* GNPA (IRAC) declined ~30bp QoQ to ~1.2%, led by ~10bp/1pp QoQ decline in Individual/Non Individual GNPA to 0.75%/2.9%.

* Total restructured pool stood at 0.6% of AUM (PY: 0.8%).

* We expect asset quality to continue to exhibit strength and we model credit costs of ~25bp/20bp for FY24/FY25.

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