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Credit cost contained at 27bps; LCR drag moderates NII growth

HDFC Limited’s (HDFC) Q3FY22 credit cost at 15% and provisioning buffer of 2.45% of advances improve visibility on growth and credit cost outlook. Maintain BUY with SoTP-based target price of Rs 3,550. Key monitorables: Behaviour of 21.8% non-individual stress pool, and rising competition in retail segment.

50bps impact of revised asset classification norms; overall stress pool down QoQ

Collection efficiency for individual loans on a cumulative basis in Q3FY22 improved to 98.9% (98% in Sep’21, 98.3% in Jun’21, 98.0% in Mar’21). Of the gross NPLs (under IRACP) of Rs124bn (2.32% of the portfolio), Rs27.5bn (>20%) comprised loans that are less than 90 days past due as of Dec’21. Following the revised asset classification norms, gross individual NPLs rose to 1.44% (1.1% in Q2FY22) while non-individual GNPA stood at 5.04% (4.69% in Q2FY22). Excluding the impact of the RBI notification, overall GNPAs would have been 1.81% with individual segment stage-3 at 1.14% and non-individual segment at 3.87%. These <90 days overdues of 50bps were reflected in Ind-AS stage-3 assets as well. Stage-3 assets rose 20bps QoQ to 2.7%; nonetheless stage-2 moderated significantly to 5.1% (from 6.2%/6.6% in Q2FY22/Q1FY22). For individual segment, stage-3 assets went up 30bps QoQ to 1.6%, stage-2 contracted to 1.8% (from 2.6%). For non-individual segment, stage-3 was down 20bps to 6.0% and stage-2 at 15.7% (vs 17%/19%)

Restructured pool at 1.34% of loans; 64% is individual loans and 36% nonindividual: Restructured pool remained at 1.34% of loan assets (vs 1.4%/0.9% in Q2/Q1FY22). Of the loans being restructured, 64% is individual loans and 36% nonindividual loans. Also, 34% pertains to just single non-individual account (Shapoorji Pallonji). In Jan’22, it recovered Rs6.3bn from this account and the management expects the balance to be settled in the near term. Post this repayment, restructured portfolio stands at 1.21% of loan book. Entire restructured portfolio is classified either under stage 2 or stage 3. Slippage on restructured portfolio was to the tune of Rs1.3bn (<2%). Loans approved under ECLGS stand at Rs22.2bn, of which, 74% has been disbursed.

Credit cost at <27bps, cumulative provisions now at 2.45%: Credit cost was <27bps (ECL charge of Rs4bn), which aided the beat on earnings. While there has been an increase in reported NPLs, there has been no financial impact and credit costs have reduced. It carries provisioning of 0.79% (0.83%, 0.75%) on individual loans and 7.64% (vs 7.83%/8.35%) on non-individual loans. Cumulatively, provisions are 2.45% (2.56%/2.64% in Q2/Q1FY22) on overall stress pool. Cumulative covid provision as of December 31, 2021 stood at Rs11.9bn, which is 9% of total provisions held. With this buffer, incremental provisioning requirement will be capped at 0.35%/0.36% over FY22E/FY23E, respectively.

Individual loan growth momentum strong, sustained at 16% YoY / 4.4% QoQ; non-individual book flat: Disbursements grew 48% for individual loans in 9MFY22 (80% in H1FY22, 181% in Q1FY22) with growth in home loans seen in both affordable housing segment as well as high-end properties. Individual disbursements in Dec ’21 were the second highest-ever for the company. On an AUM basis, growth in individual loan book was sustained at 16% YoY/4.4% QoQ (16%/13.6% in Q2/Q1FY22) and growth in total loan book on an AUM basis was 12% (11%/8%). Non-individual AUM was flat YoY as well as QoQ. Among nonindividual loans, LRD is showing improved traction and also, incrementally, developers are launching new projects. There is a healthy pipeline of LRD and project loan proposals and non-individual growth would turn positive by the end of FY22E. Overall, we are building

Some insights on individual loan customer profile: 1) individual segment comprises 79% (vs 76% YoY) of the loan book followed by 9% for construction finance, 7% for LRD and balance 5% corporate loans; 2) 30% of home loans in terms of volume and 13% in value terms were to EWS and LIG customers for 9MFY22. ATS was Rs1.11mn for EWS category and Rs1.95mn for LIG category during Q3FY22; 3) overall ATS was Rs3.30mn (vs Rs3.27mn in Q2FY22, Rs3.09mn in Q1FY22, Rs2.85mn in Q3FY21); and 4) 89% of new loan applications during Q3FY22 were received through digital channels.

NII growth moderates on a high base and due to LCR drag: NII growth moderated to 7% YoY to Rs42.8bn (compared to an average of 15-20% over the past several quarters). On the higher base of NII in Q3FY21 (when NII grew 11% QoQ in Dec’20 quarter due to equity raising benefit) as well as drag due to Rs270bn of liquidity in G-Sec for LCR requirement, we expected NII growth in Q3FY22 to be in mid-single digits. Loan spreads moderated by 12bp QoQ in nonindividual book to 3.25% while individual loan spreads were flat QoQ. NIMs were unchanged QoQ at 3.6% and up 20bp YoY. Overall, management has guided that margins are expected to be in the range of 3.4-3.6%. Further unwinding of excess liquidity will support NIMs of 3.3% / 3.3% in FY22E / FY23E, respectively.

LCR beefed up to 120%; will unwind to 60-70% in coming quarters: With effect from 1st Dec,’21, HFCs are required to maintain LCR of minimum 50%. HDFC, thereby, carried Rs270bn of HQLA in G-secs. This was over and above Rs130bn in SLR and Rs150bn of general liquidity as there was no clarity on the eligibility of SLR for HQLA. However, now SLR being eligible for HQLA will unwind liquidity to the extent of Rs150-170bn to bring LCR from 120% as of Dec’21 to 60- 70%.

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