Core mortgage business continues to remain under pressure with NII growth at its weakest in last 5 years—weak AuM growth and compressing NIMs. We fear competition from SOE Banks, weak house prices and weak volume growth could continue to depress earnings growth for HDFC. As highlighted in our Q1FY16, Q2FY16 and Q3FY16 result, AUM growth continues to remain muted. Assuming individual NPAs are fully provisioned and securitised, Net Individual AuM growth is up 17.4% y-o-y—flat for 7 quarters. On-balance sheet loan growth was also in line with estimates (+13.6% y-o-y). Core fee income showed strong growth of 37% y-o-y—driven by larger selldown of loans to HDFC Bank (which is buying back up to 70% of loans it originates vs. 50% earlier). We expect base impact of HDFC Bank’s loan buyback to kick-in by Q1FY17, although structural growth slowdown remains a risk.
Non-interest income one-off: There was a one-off of Rs 15.2 bn from the profit on sale of shares in HDFC Standard Life to Standard Life (acquisition of 9% stake). There was a capital gains tax of R3 bn for this transaction.
PPOP in line: NII growth was tepid at 4.8%. NIM (4.05%) was down 16bps y-o-y; spread on individual loans fell sharply (14bps y-o-y) to 1.85%. With operating expenses being under control (falling 0.7% y-o-y, coming 6.4% below JEFe), core PPOP grew 7.7% y-o-y (+1.3% above JEFe).
Provisioning elevated: Provisions came in 12.6% higher than JEFe even after factoring in the one-time special provision of R4.5 bn on the capital gains from insurance stake sale. There were no surprises on asset quality, with gross NPA and net NPA being largely flat sequentially.
Valuation: HDFC trades at 5.1x BV & 23.3x PE vs. 10yr avg. of 6.2x/23.3x.