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Healthy core performance in 2Q; disbursements very strong

* HDFC reported 2QFY22 PAT (in-line) of INR37.8b, up 32% YoY / 26% QoQ. The increase was primarily driven by lower credit costs of 31bps (which stood at INR4.5b, against the expectation of INR6b).

* NII (in-line) grew 14% YoY to INR41.1b. Reported spreads stood at 2.29% and were stable QoQ. Assignment income was lower than expected and stood at INR1.3b v/s our estimate of INR4.1b.

* Gross Stage 2 and Stage 3 declined to 8.67% v/s 9.24% a quarter ago. GS3% improved to 2.5% v/s 2.6% in 1QFY22. ECL/EAD declined 6bp QoQ to 2.56%

* We have largely maintained our estimates. We now model AUM growth of 13% (v/s 11% earlier) in FY22E. We estimate HDFC to deliver core RoA/RoE of ~2%/13% in FY23E. We reiterate our Buy rating, with SOTPbased TP of INR3,370 (Sep’23 SOTP-based).

Strong disbursements to sustain in 2HFY22; loan mix stable

* 1HFY22 individual disbursements grew 80% YoY (2QFY22 disbursements were up 181% QoQ). Individual disbursements in Oct’21 were the highest ever in a non-quarter-end month. Growth in home loans was seen in affordable housing as well as high-end properties. The increasing sales momentum and new project launches are positive developments for the Housing Finance sector.

* Individual AUM was up 16% YoY; total AUM was up 11% YoY. The moderation in non-individual loans, which were up ~4% QoQ (but down 5% YoY), has been stemmed. HDFC has guided for a strong pickup in non-individual disbursements in 2HFY22, which would translate into positive growth in non-individual AUM in FY22.

Improved asset quality, particularly in individual loans

* GNPA declined 24bp to 2.0% on 27bp/18bp decline in Individual/NonIndividual GNPA to 1.1%/4.7%.

* Stage 3 assets reduced 10bps QoQ to 2.5% and Stage 2 moderated to 6.2% (v/s 6.6% in 1QFY22).

* Individual segment Stage 3 contracted 30bps QoQ to 1.3%, while Stage 2 was sticky at 2.6%. Within the Non-Individual segment, Stage 3 increased 40bps QoQ to 6.2%, while Stage 2 was down 200bps QoQ to 17%.

* Stage 2 PCR declined 260bps QoQ to 15% on reduced stress and steady progress on milestones in some of the stressed assets. Stage 3 PCR increased 650bps sequentially to 55% on account of income accruals – which get accounted for through provisions under Ind-AS. Overall provisions remained stable at 2.6% of the exposure at default (EAD).

* Restructuring under OTR 1.0 and 2.0 combined stood at 1.4% of AUM (v/s 0.9% under OTR 1.0). Of the restructured loans, 63% are individual loans and 37% are non-individual loans. 35% of the restructured pool is in respect of one non-individual account.

* In Sep’21, collection efficiency (CE) in the Individual Loans segment stood at 98%, similar to the levels of Mar’21 and Jun’21.

Other highlights

* Dividend income stood at INR11.7b in 2QFY22 (v/s INR160m in 1QFY22 and INR3.2b in 2QFY21).

* There was no income from profit on sale of investments in this quarter (v/s INR2.6b in 1QFY22).

Highlights from management commentary

* It is seeing a lot of traction in construction finance in Tier 2 cities of Gujarat, Ahmedabad, Surat, and Vadodara. The Delhi and Mumbai markets are also buoyant.

* Prepayments in 1QFY22 were lower due to the second COVID wave. They are now back at normalized levels, even as the run-off rate in 2Q is still lower v/s the historical levels of 10–12%.

* Management guided that it should be able to further reduce credit costs over the next 2–3 years, which should further improve RoE. It does not plan to reverse provisions over the near term.

Valuation and view

2QFY22 was an operationally healthy quarter as the disbursement momentum was strong and collections in the Individual segment were back at pre-COVID levels. Credit costs were benign at ~31bp and the lowest in the last 11 quarters. Asset quality would exhibit steady improvement in 2HFY22 even as the Non-Individual segment would participate through resolutions/recoveries in the segment. Aggregate restructuring of 1.4% of AUM is lower relative to peers, and as such we do not expect any disappointing developments in the potential stress pool. Furthermore, with overall provisions at 2.6% of EAD, we believe HDFC has made adequate provisions for any contingencies in asset quality. Margins/Spreads should be stable despite pressure on yields, driven by declining cost of funds and a reduction in excess liquidity on the balance sheet. Our earnings estimates are largely unchanged. We expect HDFC to deliver a ~14% AUM CAGR and ~13% PAT CAGR over FY21–24. This would translate into RoA/RoE of 2%/13% in FY23E. We reiterate our Buy rating, with SOTP-based TP of INR3,370 (Sep’23 SOTP-based).

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