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Solid traction in Individual Loans ‐ annualized 18% growth run‐rate in Q4

Individual loans AUM (Home Loans + LAP) of HDFC grew by robust 4.6% qoq/12% yoy, representing a sustained sequential growth acceleration through FY21. Disbursements in Q4 FY21 grew by 60% yoy and were highest‐ever in March. While prepayment rate stood at 10.3% for FY21 (historically 10‐12%), it was higher during the last quarter with significant increase in part‐prepayments (not BT Out). Share of individual loans in incremental growth was 92% and 116% in FY21 and Q4 respectively. Growth in construction finance and LRD remains impacted by cautious disbursements and accelerated run‐off.

Steady NIM and healthy core PPOP growth ‐ remains immune to competition  

Individual loan spreads of HDFC continues to be steady at 1.9%, notwithstanding tight competition in the market and the corporation not just maintaining but gaining marginal market share in recent quarters. Matching the decline in portfolio yield (strong disbursement momentum + existing loan re‐pricing), the borrowing cost came‐off on the back of favorable wholesale funding environment, bank’s risk‐aversion in HFC/NBFC segment and proactive cuts effected by the co. in deposit rates. Cumulative NIM improved further to 3.5% with systematic reduction of surplus liquidity. Core PPOP (adj. for non‐operating and other income) growth in Q4/FY21 stood at 15.5%/17%, well ahead of AUM growth.

Stable asset quality ‐ comforting ECL coverage on non‐individual stress portfolio

Gross NPLs (Stage‐3 assets) in individual loan segment was flat sequentially, while there was some increase in the non‐individual loans. Collection efficiency through Q4 FY21 stood near pre‐Covid level at 98% for individual loans, as against 96.3% in September (first month after moratorium). This portfolio remained pristine amid the first wave, reflected in 97% of loans in Stage‐1 and marginal restructuring of <30 bps. Restructuring was 2.5% in non‐individual loans portfolio, with one single account being 2%. ECLGS sanctions stand at 40 bps of AUM. Both restructured assets and ECLGS disbursements have been categorized as Stage‐2 assets. While Stage‐2 and Stage‐3 levels in non‐individual loans are high at 19% and 5% respectively, HDFC is holding significant coverage on them at 21% and 70% respectively. During Q4, the Covid buffer was also raised by Rs2.5bn to Rs8.4bn (20 bps of loan book)

Watchful near‐term commentary ‐ management confident about quick recovery

As per management, April did not witness any significant impact from the pandemic resurgence, as quantum of new loan applications was healthy, disbursements till the first week of May were higher than Q1 FY21 and collection efficiency was in‐line with April 2019 (near normal). While business activity and collections is likely to get hit in May, HDFC remains confident of a swift recovery in operations post easing of the pandemic.

A relatively stronger play on structural housing upcycle – initiate coverage with a BUY and 12m PT of Rs3020  

Considering HDFC’s strong market position (~18% market share in individual mortgages), robust distribution and execution architecture (being bolstered by origination tie‐ups), high‐quality portfolio of individual loans, well‐provided stress in non‐individual segment (32% provisioning on PAR 30) and robust capital position (Tier‐ 1 at 21.5% and D/E at 4.2x), we believe that company is well‐placed to benefit from a widely expected structural housing market recovery. As compared to H2 FY21, we see stronger growth and asset quality outcomes over FY22‐24 as business and asset quality should improve in non‐individual segment also. We project core PPOP growth of 13‐ 14% over FY21‐24 with stable spreads (competition unlike to impact in future too). Initiate coverage with a BUY and 12m PT of Rs3020. The core mortgage business is available at 1.9x FY23 P/ABV.

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