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Collection efficiency stable; stage-2 pool down; core steady

HDFC Ltd’s FY21 earnings reflects its improving market positioning with capital buffer and efficiency, funding cost benefit and contained stress (stage-2/3 pool at 8.7%). Despite weak real estate sentiment amidst covid and 27% exposure to non-individual segments, credit cost was mere 60bps in Q4FY21 as well as FY21. On stress pool (stage-2/3) of 24%/3% in non-individual/individual segments, HDFC is carrying provisions of 8.16%/0.65%. On individual loans, disbursement growth of 60% YoY (3% for FY21) suggests gain in market share.

Non-individual AUM growth under pressure due to repayments, pre-payments and cautious stance. Despite shift in mix towards retail segments, NIMs were sustained due to benefit from lower funding cost. AUM growth momentum in low double digits (13% in retail segment) and overall provisioning buffer of 2.6% (of advances) improves visibility on growth and credit cost outlook. Maintain BUY with an SoTP-based target price of Rs 3,307. Key monitorables will be: behaviour of 24% of the non-individual stress pool, and rising competition in retail segment.

* Stage 2/3 pool down from 9.3% to 8.7% with some resolutions; collection efficiency broadly stable:

Collection efficiency for individual loans has improved only marginally from 97.6% in December to 98% in March. GNPLs settled at 1.98% -- slightly higher than Q3FY21 proforma GNPLs of 1.91% - with individual NPLs at 0.99% (0.98% QoQ) and non-individual NPLs at 4.77% (4.35% QoQ). Stage-3 assets were flat QoQ at 2.3%; however, stage-2 were down from 7.1% to 6.3% due to resolutions in a few nonindividual loans during the quarter. Almost 19% of non-individual loans are in stage-2 constituting more than 75% of overall stage-2 pool. HDFC is carrying provisions of 21% on non-individual stage-2 assets. Stage-2 in the individual book is less than 2%. Company has been proactive in downgrading loans to stage-2 wherever it sees even the slightest degree of stress or has sought OTR or ECLGS benefit.

* Restructuring was lower than in Q3FY21; ECLGS less than 50bps:

Restructuring came in lower than in Q3FY21 at Rs44.8bn – 0.8% (compared to Rs50bn or 0.9% of AUM in Q3FY21). Of the loans being restructured, 27% are individual loans and 73% are non-individual (Rs32bn classified in stage-2). Of the overall restructuring, Rs26bn (0.5% of AUM) pertains to a single group, Shapoorji Pallonji. Balance restructuring in nonindividual segment is spread across various accounts. ECLGS request of Rs24.8bn is also majorly included in stage-2, though only Rs9.6bn has been disbursed as yet.

* Credit cost at sub-60bps for Q4FY21 as well as FY21:

With incremental provisioning of Rs7.2bn, outstanding provisions inched up from Rs123bn to Rs130bn – 2.6% of EAD (exposure at default). Write-offs were less than Rs1bn during the quarter vs Rs6.4bn in Q3FY21 and Rs13.7bn for fiscal FY21. Company carries cumulative covid provisions of Rs8.4bn (<20bps). With this buffer, incremental provisioning requirement will be capped at 0.7%/0.4% over FY22E/FY23E respectively.

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