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Earnings beat estimates; healthy NII growth and asset quality improvement led to a strong quarter

HDFC reported yet another strong quarter. Earnings were buoyed by healthy NII growth and higher assignment income. Asset quality improved across both individual and non-individual segments with GS3 declining 40bp QoQ to 2.3%. FY22 reported PAT grew 14% YoY while spreads and margins were stable at ~2.3% and 3.5% YoY, respectively. Disbursements in the individual segment continued to remain buoyant and were complemented by healthy momentum in the non-individual segments as well. Unarguably, with the merger announced, taking a view in isolation is difficult but we believe that HDFC continues to have a strong ‘Right to Win’ in its standalone mortgage business. We maintain our BUY rating on the stock with a TP of INR2,900 (premised on Mar’24E SOTP).

Disbursement momentum to sustain; building in 15% AUM growth in FY23E

HDFC reported 4QFY22 PAT of INR37b (9% beat), up 16% YoY. Credit costs were largely stable sequentially at ~30bp.

FY22 disbursements in the individual segment grew 37% YoY. Individual disbursements in Mar’22 were the highest ever monthly disbursements despite the absence of concessional stamp duty benefits. We expect the momentum to sustain and model 14% AUM CAGR over FY22-FY24.

Individual AUM was up 17% YoY; while total AUM grew 15% YoY. HDFC has guided for a strong pipeline in non-individual segment, which would translate into healthy growth in non-individual AUM.

Healthy improvement in asset quality; credit costs should moderate

Gross S2 + S3 (combined, 30+dpd) declined to 6.7% from 7.9% QoQ. GS3 declined 40bp QoQ to 2.3%. ECL/EAD declined 7bp QoQ to 2.4%.

Asset quality should exhibit strength and continue to improve over FY23- FY24. We model credit costs of 30/25bp in FY23E/24E, respectively.

The total restructured pool stood at 0.8% of the AUM (v/s 1.3% as of 3QFY22). The largest non-individual account restructured under the resolution framework of ~INR27.6b was fully repaid in 4QFY22

Highlights from the management commentary

NII growth was muted in 3QFY22 because of higher liquidity of INR550b. Average liquidity has now dipped to INR460b, which is higher than what is required by the regulation and there is still some scope to bring it down.

Construction finance will continue even in the bank structure as the bank understands that to offer housing loans, one needs to offer construction finance also.

FY22 prepayments stood at 10.3% (same as in FY21).

Valuation and view: Growth momentum to sustain; Maintain BUY

HDFC’s 4QFY22 was an operationally healthy quarter as the disbursement momentum was strong and collections in the individual segment remained healthy. Credit costs were benign at ~30bp and the asset quality exhibited strength across both individual and non-individual segments.

We estimate that HDFC would be able to maintain its spreads/margins at current levels with perhaps a ~10bp deterioration in FY24E. With overall provisions being at 2.45% of EAD, we believe HDFC has made adequate provisions for any contingencies in asset quality.

We have largely maintained our estimates. We expect HDFC to deliver a ~14% AUM and PAT CAGR each over FY22-FY24E.This would translate into an RoA/RoE of 2.0%/13% in FY23-FY24E, respectively. We reiterate our BUY rating on HDFC with a TP of INR2,900 (premised on Mar’24 SOTP).

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