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Core operating profit in-line; commentary suggests healthy recovery from second wave impact

* HDFC’s core PBT grew 12% YoY to INR32.2b (5% beat). NII (ex-assignment income) at INR41.3b was 2% above our estimate. On the other hand, provisions at INR6.9b were lower than our est. of INR8b. Better-than-expected MTM gains on investment led to an 11% beat on reported PAT (down 6% QoQ / 2% YoY).

* Strong disbursement growth (on a low base) of 181% YoY, stable QoQ spreads at 2.3%, 26bp QoQ deterioration in GNPA to 2.24%, and an increase of 30bp QoQ in Stage 2 assets were some of the operational highlightsfor the quarter.

* We increase our FY22E/FY23E estimates by 7–8%, factoring in higher NII and non-core income. We expect HDFC to report core RoA/RoE of 2%/13% over FY22–23E. Reiterate Buy, with SOTP-based TP of INR3,290 (FY23E SOTPbased).

Disbursements recover sharply over Jun–Jul’21; loan mix largely stable

* The recovery in disbursements was much stronger than expected at the start of the second COVID wave. July’21 disbursements were the third highest ever and the highest ever in a non-quarter month-end. Overall individual AUM grew 2% QoQ / 14% YoY to INR4.5t. The share of individual loans was up ~100bp QoQ to 78.3% (the highest ever).

* Non-Individual segment AUM declined ~4% QoQ and ~9% YoY. Growth in this segment was partially impacted by pre-payments in LRD due to the listing of REITs, leading to a run-off of AUM. Also, because construction activity was impacted during the lockdowns, even the disbursements in construction finance suffered in 1QFY22. Overall AUM grew +1% QoQ / 8% YoY to INR5.74t.

* The company assigned loans worth INR55b during the quarter v/s INR14b YoY. The corresponding assignment income stood at INR2.7b (v/s INR4.4b QoQ and INR1.8b YoY).

GNPLs at 2.24% | Stage 2 loans up QoQ | Restructuring under RBI OTR 2.0 at 15bp of AUM

* The overall GNPL ratio increased 26bp QoQ to 2.24%. This was more pronounced for the individual book, which saw 38bp QoQ deterioration in GNPA. However, the corporate book witnessed just a 10bp increase in the GNPL ratio to 4.87%.

* Stage 2 loans increased 30bp QoQ to 6.64% on some proactive downgrades and restructured advances classified under Stage 2. On a YoY basis, Stage 2 was up 133bp.

* During the quarter, the company restructured loans worth INR7.78b (15bp of AUM). ~62% of the restructured advances is from the NonIndividual segment and largely pertains to just one account, which forms ~50bp of AUM.

* The company continues to maintain elevated provisions. The total buffer stands at ~2.64% of loans.  In Jul’21, for the Individual Lending business, collection efficiency (CE) stood at 98.3% v/s 98.0% in Mar’21.

Healthy margins; lower liquidity on balance sheet reduces negative carry

* Overall spreads were sequentially stable at 2.3%; reported NIMs improved 20bp QoQ to 3.7%, while calculated NIMs were stable. The average daily balance in liquid funds was INR152b in 1Q v/s INR157b QoQ.

* While individual spreads were stable QoQ at 1.93%, non-individual spreads improved to 3.32% (v/s 3.22% for FY21).

* Total borrowings were largely flat at INR4.4t. The share of deposits in total borrowings inched up ~105bp QoQ to ~35.1%. Total deposits were up ~2% QoQ to INR1.54t.

Highlights from management commentary

* ECLGS of INR13.9b was disbursed up to Jun’21. Many of these loans are classified as Stage 2. It received applications worth INR2.66b (~5bp of AUM) under ECLGS 3.0.

* HDFC is optimistic about reducing credit costs in the coming years, driven by provision reversals/write-backs on customer accounts, where it has conservatively made provisions.

* All collection efforts are now online, and currently, there are restrictions on resorting to legal means through SARFAESI.

Other highlights

* The average size of individual loans disbursed in 1QFY22 stood at INR3.09m (INR2.95m in FY21). An uptick was seen in the average ticket size and was attributable to demand for higher end properties, especially in metro cities.

* In 1QFY22, ~33%/14% of home loans approved in volume/value terms was to customers from the Economically Weaker Sections (EWS) and Low Income Groups (LIG). Average home loans to the EWS/LIG segment stood at INR1.11m/INR1.93m.

* CAR remains healthy at 22.0%, with Tier I of 21.3%. RWA declined marginally to INR3.97t (v/s INR4.0t in 4QFY21) on account of a higher proportion of individual loans in the mix.

Valuation and view

1QFY22 was a decent quarter on the operational front, despite the impact on disbursements in Apr/May’21. Disbursements picked up MoM in Jun/Jul’21, far exceeding YoY levels. With declining cost of funds and a reduction in excess liquidity on the balance sheet, margins should be stable despite pressure on retail lending yield due to continued aggression from banks in the Mortgage space. Reported CE trends in Jul’21 were encouraging and better v/s Mar’21 levels. With provisions >GNPLs, we believe the company has made more-than-adequate provisions for any potential asset quality slippage in the ensuing quarters. We increase our core PBT/PAT estimate for FY22/FY23E by 7–8% to factor in higher NII and fee income. We expect HDFC to report core RoA/RoE of 2%/13% over FY22–23E. Reiterate Buy, with SOTP-based TP of INR3,290 (FY23E SOTP-based).

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