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Non-individual stress pool steady; lower credit cost resulted in upbeat PAT

HDFC Ltd’s Q1FY22 result reflects its superior portfolio quality with stress (stage2/3) pool being contained at 9.2%. Individual segment saw 40-50bps rise in stage2/3 as collections were being hampered while resolution in non-individual segment supported steady stress pool.

Credit cost was capped <60bps beating our earnings expectations. On stress pool (stage-2/3) of 25%/4.1% in nonindividual/individual segments, HDFC is carrying provisions of 8.35%/0.75%. Individual loan growth momentum gained traction to 14% YoY (up 2% QoQ) suggesting improving market positioning. Non-individual AUM growth was under pressure due to repayments and cautious stance.

Despite shift in mix towards retail segments, NIMs were sustained due to benefit from lower funding cost. Individual AUM growth of 14-16% and provisioning buffer of 2.64% (of advances) improve visibility on growth and credit cost outlook. Maintain BUY with SoTPbased target price of Rs3,307. Key monitorables: Behaviour of 24% non-individual stress pool and rising competition in retail segment.

* Non-individual portfolio stress pool steady, disrupted collections pushed up some stress in individual loans: GNPAs increased from 1.98% QoQ to 2.24% of the loan portfolio. Individual NPAs increased due to slippages on account of collection efforts being hindered. Recovery teams were unable to do field visits during the lockdown period. However, collection efficiency for individual loans on a cumulative basis in Jun’21 is back to 98.3% (vs 98.0% in Mar’21). For individual segment, stage-3 assets rose 40bps QoQ 1.6% and stage-2 was up 50bps to 2.5%. There were quite a few resolutions in non-individual segment and despite 4% decline in the portfolio, stage-3 and stage-2 pools were steady at 5.8% and 19%, respectively.

* Restructuring up by Rs7bn in Q1; ECLGS less than 50bps: HDFC has restructured Rs44.82bn (OTR 1.0 Rs37bn + OTR 2.0 Rs7bn) which is equivalent to 0.9% of loan book. Of the loans restructured, 38% are individual loans and 62% non-individual loans. Of this, there is only one large non-individual account (Shapoorji Pallonji) under restructuring while others are not big-ticket account. Requests received under OTR 2.0 is Rs7.78bn (15bp of loan book) and all restructured loans are classified under stage 2. ECLGS cumulative disbursement under ECGLS 1.0 & 2.0 was Rs14bn (vs sanctions of Rs25.1bn), while Rs2.7bn was disbursed under ECGLS 3.0.

* Credit cost lower QoQ as non-individual stress pool steady: Credit cost was <60bps in such a challenging environment (better than our expectations). It created additional covid provision of Rs1.73bn to take cumulative covid provisions of Rs10.2bn (~20bps of loans). Overall, it carries provisioning of 0.75% on individual loans and 8.35% on non-individual loans. Cumulatively, provisions are 2.64% on overall stress pool Write-offs came in at Rs5.3bn during the quarter vs Rs1bn in Q4FY21 and Rs6.4bn in Q3FY21. With this buffer, incremental provisioning requirement will be capped at 0.6%/0.4% over FY22E/FY23E, respectively.

* Individual loan growth momentum improves; moderation seen in nonindividual book: Individual loan disbursements grew 181% YoY (on a lower base) with growth in home loans seen in both affordable housing segment as well as high-end properties. Also, buyers preferred ready-to-move in properties compared to under-construction ones. Due to covid second wave, disbursements were impacted in the first two months of FY21 but trends have been encouraging since June. Jul’21 has seen the highest ever disbursement in a non-quarter month. Furthermore, disbursements in the first four months of FY22 were 108% of the disbursement level achieved during H1FY21.

With disbursements of Rs255bn, growth in individual loan book was 13.6% (vs 12.4%). Nevertheless, growth in overall loan book was restricted to 8%. Moderation was primarily due to 8% YoY decline in non-individual loans. The management highlighted there is healthy pipeline of LRD and project loan proposals and non-individual growth would turn position by the end of FY22. Overall, we are building in loan growth of 14%/16% for FY22E/FY23E, respectively.

* Some insights on individual loan customer profile: 1) 81% new customers were salaried, while 19% were self-employed in individual segment in Q1FY22; 2) 56% of portfolio is skewed towards first-purchase homes directly from the builder followed by 36% for resale and 8% for self-construction; 3) individual comprises 78% of loan book followed by 10% for construction finance and 6% each for LRD and corporate loans; 4) 33% home loans and 14% in value terms were to customers from EWS & LIG customers wherein ATS was Rs1.11mn for EWS category and Rs1.93mn for LIG category during Q1FY22; 5) overall ATS was Rs3.09mn for the quarter; and 6) 88% of new loan applications during Q1FY22 were received through digital channels.

* NIMs up 20bps to 3.7%: Interest expenses were down by 17% YoY / flat QoQ thereby, inching up margins to 3.7%. Loan spreads continued at 2.29% (flat QoQ and 2.26% YoY) – of which individual loan spreads were flat QoQ 1.93% (vs 1.89% YoY) and non-individual was up 10bp QoQ/14bp YoY at 3.22%. Unwinding of liquidity to Rs152bn vs Rs157bn//Rs320bn in Q4/Q1FY21 supported decline in funding cost. We expect NIMs of 3.3%/3.2% in FY22E/FY23E, respectively.

* HDFC reported Q1FY22 PAT of Rs30.0bn – down 2% YoY / 6% QoQ and ahead of expectations due to much lower credit cost of sub-50bps (at Rs6.9bn against our expectations of >Rs11bn). Q1FY22 earnings included: o Rs2.63bn towards profit on sale of investments and Fair value gain on investments of Rs4.0bn. o Net gain on fair value changes and income on loans assigned: Rs2.7bn o Charge for employee stock options: Rs1.456n.

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