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Strong operational delivery

Our view 

HDFC delivered a 3-4% NII/PPOP beat on the back of a) stronger-than-expected AUM growth (IL growth in-line but non-IL segment witnessed growth revival) and b) 7% qoq NII growth which was aided by CoF reduction and loan spread improvement of 15 bps in non-IL segment due to rate hikes in recent months. G-secs held by HDFC are currently near Rs400bn, enough to meet FY23 LCR requirements.

Asset quality performance was strong too with 10% abs. reduction in Stage 2 & 3 combined and the buckets shrunk by 110 bps qoq to 6.7%. Collection efficiency in IL segment on a cumulative basis was at 99%+ in Q4 FY22 (98.9% in Q3 FY22) and there was a recovery of a large non-IL restructured account (worth Rs27.6bn) which reduced the OTR book to Rs45.7bn, 0.8% of loans (down from peak of 1.4% as of Sept). There was a marked improvement in IL/Non-IL GNPL to 1%/4.8% from 1.4%/5% as of Dec 2021 with loan write-offs being negligible. Credit cost in Q4 FY22 was at annualized 26 bps, but largely represented a prudential stance of augmenting ECL coverage on Stage 2/3 assets (co. did not take provision releases in the P&L from bucket improvements)

Asset quality performance was strong too with 10% abs. reduction in Stage 2 & 3 combined and the buckets shrunk by 110 bps qoq to 6.7%. Collection efficiency in IL segment on a cumulative basis was at 99%+ in Q4 FY22 (98.9% in Q3 FY22) and there was a recovery of a large non-IL restructured account (worth Rs27.6bn) which reduced the OTR book to Rs45.7bn, 0.8% of loans (down from peak of 1.4% as of Sept). There was a marked improvement in IL/Non-IL GNPL to 1%/4.8% from 1.4%/5% as of Dec 2021 with loan write-offs being negligible. Credit cost in Q4 FY22 was at annualized 26 bps, but largely represented a prudential stance of augmenting ECL coverage on Stage 2/3 assets (co. did not take provision releases in the P&L from bucket improvements)

We raise FY23/24 EPS/ABV estimates by 5-6%/1.5-2% led by significant operational beat in Q4 FY22. We continue to believe that merger is beneficial for HDFC Ltd.’s shareholders due to a) increases potential growth of mortgage franchise, b) could materially lift profitability of the book, c) enhances stickiness of portfolio (will lower borrower attrition), d) enables risk-taking in more profitable non-IL segment, e) improves capital position, f) erases holding company discount, and g) transitions investors’ holding into a diversified and strengthened combined entity. Retain BUY with 12m PT of Rs3250

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