Improvement in assets under management (AuM) growth was the only positive offset by weaker spreads and higher NPAs across both individual and non-individual loans resulting in core PPOP growth of 7.4%. Valuations leave no room for upside risk. Rollover earnings and up price target to R1,255. Retain Hold.
AuM & loan growth pick up—higher disbursals
AuM growth picked up 16.4% y-o-y vs 15.1% q-o-q. Individual loan disbursements were up 26% y-o-y, vs 18% in FY16. Loans sold in Q1FY17 were R51 bn, 32% y-o-y. Despite this, on-balance sheet loan growth improved to 15% y-o-y vs 13.6% q-o-q. Individual loans grew 16.1% y-o-y, accounting for 70% of the book. Non-individual loans grew 12.3% vs 9.3% in FY16.
Margins flat (weak)
NIM was 3.8% (flat y-o-y)—near the bottom end of the last 20 quarter range. Cost of funds was down 71bps y-o-y while the yield was down 82bps. Spread for Q1FY17 was 12bps lower y-o-y at 2.4%.
Core profitability muted
Core PPOP growth was weak at 7.4% y-o-y. Net interest income grew 9.4% y-o-y driven by improved loan growth. Non-interest income includes profit on sale of investment of R9.22 bn vs. R0.23 bn y-o-y from sale of stake in HDFC Ergo General Insurance to its JV partner. While total standalone revenue was up 48% y-o-y, core revenue (excluding trading profits and dividend income) was up only 9.3% y-o-y. The expense ratio was 10.7% vs JEFe of 7.1% due to reclassification of commission expenses.
Asset quality worsens
Non-individual loans NPAs were flat q-o-q (111bps vs 112bps q-o-q), but worsened y-o-y (vs 104bps). Individual loan NPAs (55bps) worsened both y-o-y (48bps) and q-o-q (49bps). Total gross NPA was 75bps, up 6bps y-o-y and 5bps q-o-q. Net NPA was 55bps, up 7bps y-o-y and 6bps q-o-q.
Taking estimates down
While acknowledging the long term home-loan underpenetration story, we think housing markets have slowed down considerably. In particular, corporate & developer loans—larger ticker, higher spread business—have weakened. We expect growth of 18% but at lower spreads resulting in 6.1%FY16-19e EPS CAGR.
HDFC trades at 6.1x BV (Jun 16, not grossing for unrealised gains) and 31.5x EPS (12 million Jun 17e) versus 10 yr avg. of 5.45x and 23.4x respectively. We value HDFC at 5.2x BV (June 17e) and 25.0x EPS (12 million Jun 18e).
Weak volumes, asset quality worries.
Housing Development Finance Corporation Limited (HDFC Ltd.) was established in 1977 with the primary objective of meeting a social need of encouraging home ownership by providing long-term finance to households. HDFC has turned the concept of housing finance for the growing middle class in India into a world-class enterprise with excellent reputation for professionalism and integrity. Over the years, it has emerged as a financial conglomerate with its presence in the entire gamut of financial services.
AuM and loan growth pick up
Higher disbursals AuM growth picked up 16.4% y-o-y, vs 15.1% seen in FY16. Individual loan disbursements picked up 26% y-o-y. While we don’t have the number for Q1FY16, the full year figure for FY16 was 18%, suggesting an improvement. Loans sold in Q1FY17 were R51 bn (R33 bn to HDFC Bank and R18 bn to other banks), 32% higher than the R38.7 bn sold to HDFC Bank in Q1FY16. Despite this, on-balance sheet loan growth improved to 15% y-o-y, vs 13.6% seen for FY16 driven by the higher disbursals. Individual loans grew 16.1% y-o-y, and continue to account for 70% of the loan book. Non-individual loans went up to 12.3% vs 9.3% in FY16. HDFC Bank is now buying back a larger share of loans it originates (up to 70% from 50% in FY15). We expect the impact of the larger buyback by HDFC Bank on AuM growth for HDFC to play out till September 2016, post which the trend should normalise.
Margins flat (weak), funding mix moves towards term-loans for the quarter
NIM was 3.8% (flat y-o-y)—very seasonal for HDFC—near the bottom end of the range seen in the last 20 quarters (3.65%-4.66%). On y-o-y basis, calculated cost of funds was down 71bps, whereas the calculated yield was down 82bps. Spread for the quarter was 12bps lower on a y-o-y basis at 2.4%. Spreads in individual loans were down 5bps y-o-y to 1.92%, and flat for non-individual loans at 3.06%.