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Strong operating performance across parameters

* HDFC’s core PBT grew 19% YoY to INR33.4b (estimate of INR34.2b) of). NII (ex-assignment income) at INR40.3b was 4% above our estimate. On the other hand, provisions at INR7.2b were much higher than our est. of INR3.8b. Better-than-expected MTM gains on investment led to a 12% beat on reported PAT (+9 QoQ /42% YoY).

* For FY21, core PBT / core operating profit grew a healthy 15%/17% YoY to INR126b/INR146b, despite an additional ESOP charge of INR3.4b.

* Strong disbursement growth (on a low base) of 60% YoY, stable QoQ spreads at 2.3%, GNPA at 1.98%, and a reduction of 74bp QoQ in stage 2 assets were the key positives for the quarter

* We largely maintain our estimates. We expect HDFC to report core RoA/RoE of 2%/13% over FY22–23E. Reiterate Buy, with SOTP-based TP of INR3,275 (FY23 SOTP-based).

Robust disbursement performance; loan mix largely stable

* The recovery in disbursements was much stronger than expected at the start of FY21. During the fiscal, HDFC reported 3% YoY growth in individual disbursements, with 4Q/2H coming in at 60%/42% YoY. Overall individual AUM grew 5% QoQ / 12% YoY to INR4.4t. The share of individual loans was up ~120bp QoQ to 77% (the highest ever).

* Non-Individual segment AUM declined ~2% QoQ and grew just 4% YoY. Growth in this segment was partially impacted by pre-payments (INR94b) in LRD due to the listing of REITs, leading to a run-off of AUM. An uncertain environment also led to higher risk aversion. Overall AUM grew +3% QoQ / 10% YoY to INR5.7t.

* The company assigned loans worth INR75b during the quarter v/s INR55b YoY. The corresponding assignment income stood at INR4.3b (v/s INR4.1b QoQ and INR2.4b YoY).

GNPLs at 1.98% | stage 2 loans up YoY | restructuring at 80bp of AUM

* The overall GNPL ratio increased 7bp YoY to 1.98%. However, the corporate book witnessed a 42bp increase in the GNPL ratio to 4.77%.

* Stage 2 loans decreased 74bp QoQ to 6.3% due to some downgrades and resolutions in the accounts. On a YoY basis stage 2 is up 84bp due to 1) select stage 1 accounts opting for ECLGS and 2) the classification of all restructured accounts as stage 2 loans.

* During the quarter, the company restructured loans worth INR44.8b (80bp of AUM). ~73% of these loans are from the Non-Individual segment, of which one account forms ~50bp of AUM.

* The company continues to maintain elevated provisions. The total buffer stands at ~2.6% of loans – the highest in our HFC Coverage Universe.

* In Mar’21, for the Individual Lending business, collection efficiency (CE) stood at 98.0% on an overall basis (97.6% in Dec’20) – similar to pre-COVID levels.

Margins largely stable; lower liquidity on balance sheet

* Overall spreads were sequentially stable at 2.3%; NIMs improved 10bp QoQ to 3.5%. The average daily balance in liquid funds was INR157b in 4Q v/s INR168b QoQ.

* While individual spreads were stable at 1.93% for FY21 v/s 9M, non-individual spreads improved to 3.22% (v/s 3.14% for 9M).

* Total borrowings increased ~2% QoQ to INR4.4t. The share of deposits in total borrowings inched up 92bp QoQ to ~34%. Total deposits edged up ~5% QoQ to INR1.5t.

Highlights from management commentary

* INR9.36b ECLGS has been disbursed to date. Many of these loans are classified as Stage 2.

* There seem to be fewer bottlenecks amid the second wave. Disbursements in Apr’21 were more than in 1QFY21.

Other highlights

* The average size of individual loans disbursed for FY21 stood at INR2.95m (INR2.70m in FY20). An uptick was seen in the average ticket size to INR3.14m in 4Q, attributable to demand for higher end properties, especially in metro cities.

* In FY21, ~33%/16% of home loans approved in volume/value terms were to customers from the Economically Weaker Sections (EWS) and Low Income Groups (LIG). Average home loans to the EWS/LIG segment stood at INR1.08m/INR1.86m

* ~0.23m customers have availed benefits under the Credit Linked Subsidy Scheme (CLSS). Cumulative loans disbursed under CLSS stood at INR393b. The subsidy amounted to INR52.1b.

* The final dividend stood at INR23/share v/s INR21/share a year ago.

* CAR remains healthy at 22.2%, with Tier I of 21.5%. RWA assets were flat YoY at INR3.98t.

Valuation and view

4QFY21 was a strong quarter on all fronts. Disbursements have been picking up MoM and have exceeded YoY levels over the past quarter. 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. CE trends are encouraging. With provisions >GNPLs, we believe the company has made more-than-adequate provisions for any potential asset quality slippages in the ensuing quarters. Our core PBT/PAT estimate for FY22/FY23E remains largely unchanged. We expect HDFC to report core RoA/RoE of 2%/13% over FY22–23E. Reiterate Buy, with SOTP-based TP of INR3,275 (FY23 SOTP-based).

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