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Loan assignments higher YoY and QoQ; LCR requirement will lead to a minor negative carry

Takeaways from HDFC’s pre-quarterly release

* HDFC sold down loans worth INR74.7b in 3QFY22 v/s INR70.8b YoY and INR71.3b QoQ. We expect HDFC Ltdto report an upfront assignment income of INR3.8-4b from the sell-down. Important to note that HDFC has sold ~INR200b worth of loans in 9MFY22 v/s ~INR115b in 9MFY21.

* Profit from the sale of investments was zero. In 3QFY21, it had reported a profit from the sale of investments of INR1.57b. This was from a part stake sale in HDFC Life Insurance to pare down its stake to 49.99% and to comply with RBI guidelines.

* Under Ind AS guidelines, employee stock options are fairly valued and charged to the P&L under employee expenses over a two-year vesting period. ESOP expense should now decline to a quarterly run-rate of INR0.6- 0.7b over the next four quarters (almost half and much lower than the quarterly run-rate of INR1.2-1.4b in the preceding four quarters).

* Dividend income stood at INR1.95b v/s INR22m in 3QFY21. These were dividends paid by HDFC Bank to HDFC Investments and were subsequently passed on to the parent HDFC for tax efficiency.

* Effective 1st Dec’21, NBFCs and HFCs are required to maintain a minimum Liquidity Coverage Ratio (LCR) of 50%. For the purpose of LCR, the company carried ~INR270b of unencumbered High Quality Liquid Assets (HQLA), entirely in government securities. It also held INR130b in HQLA for SLR requirements against deposits and INR150b of liquid assets as a general liquidity buffer. Cumulatively, it held liquid buffers of ~INR550b. HQLA for LCR requirements will lead to a negative carry on the corresponding amount.

* HDFC is our preferred pick in the Housing Finance space. We like HDFC’s ability to gain profitable market share, despite significant competitive pressures. The Real Estate market continued its buoyancy in 3QFY22, but non-Individual disbursements are yet to pick-up and will start exhibiting healthy disbursement growth after another two quarters.

* With incremental cost of funds from capital markets at 5.5-6% and despite the muted growth in the non-Individual loan book, it has been able to manage spreads. The company has built a large provision buffer to guard against contingencies in NPLs from COVID-led disruptions. We do not estimate any out-sized credit costs/provisions because of the recent RBI guidelines on daily stamping of NPA and stricter NPA up-gradations norms. We expect it to deliver a core RoE of ~13% in the medium term.

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