HDFC rating ‘Hold’: A stable performance in operational terms

By: | Published: August 6, 2018 1:43 AM

NIMs saw weak trend; comparisons difficult due to IND-AS; FY19 estimates up 8%; ‘Hold’ maintained with TP revised to Rs 1,930.

HDFC reported 53% y-o-y improvement in net income under IND-AS. AuM growth was ~18% although NIMs seem a tad soft at 3.5%. We rollover earnings, change price target to Rs 1,930. Retain Hold.

HDFC reported 53% y-o-y improvement in net income under IND-AS. AuM growth was ~18% although NIMs seem a tad soft at 3.5%. We rollover earnings, change price target to Rs 1,930. Retain Hold.

IND-AS adjustments
HDFC has provided very limited information on the IND-AS adoption and reconciliation with I-GAAP. Under IND-AS, the aggregate ECL provisions are now at 118 bps, with Stage 3 provisions at 29% [life time loss of 71%] while general provision for Stage 1 & 2 assets is about 19 bps. While the I-GAAP to IND-AS net income reconciliation has been provided, that’s of little consequence, as the underlying change in opening shareholders’ equity hasn’t been provided. Other than that, HDFC has chosen to report investment gains at cost rather than MTM of the entire portfolio – prudent as its equity would have bloated up through the OCI (Other Comprehensive Income).

Retail AuM steady
Net individual (retail) AuM (on-balance sheet individual loans ex-NPL plus outstanding securitised loans) growth seems stable at ~18% y-o-y. Individual disbursal growth was weaker at 17%
y-o-y (Q3FY18 : 27% y-o-y, Q4FY18: 29% y-o-y). Net loans on the books declined as HDFC Bank started buying back loans which are fully disbursed.

NIM trends weak
NIM for the quarter was at 3.5% vs. 3.4% in Q1FY18. These are restated numbers under IND-AS, but reported a decline vs.
I-GAAP came from the netting of interest expense of ZCBs, grossing of fees among others. NII grew 21.9% y-o-y. On a reported basis, retail loan spreads were at 1.91% and corporate loan spreads at 3.14%. Funding mix changed in favour of term loans.

NPLs elevated
Headline NPL ratio was up 7 bps q-o-q to 118 bps (individual up +2 bps q-o-q at
66 bps, corporate up 14 bps to 232 bps).

Tweaking our estimates
We have tried remodelling based on available Effective Interest Rate and ECL provision rates such that the overall provisions remain flat at 1.3% of loans. Along with reallocation of fee and other income within NII and segregating certain expenses, the core PPOP declines between 1-4% over FY19-21e. This has been largely offset by lower ECL provision assumptions under 10 bps. Consequently, FY19e estimates move up by 8% while remaining broadly flat for future years. We still don’t have the
IND-AS adjusted equity base to offer our comments. We continue to forecast AuM CAGR of 19.3% over FY18-21e.

IND-AS adjustments
HDFC has provided very limited information on the IND-AS adoption and reconciliation with I-GAAP. Under IND-AS, the aggregate ECL provisions are now at 118 bps, with Stage 3 provisions at 29% [life time loss of 71%] while general provision for Stage 1 & 2 assets is about 19 bps.

Retail AuM & corporate loans steady; disbursal growth declines
Net individual (retail) AuM (on-balance sheet individual loans ex-NPL plus outstanding securitised loans) growth seems stable at 18% y-o-y. Individual disbursal growth was weaker at 17% y-o-y (Q3FY18: 27% y-o-y, Q4FY18: 29% y-o-y). Net loans on the books declined as HDFC Bank started buying back loans which are fully disbursed.

NIMs trend weak but too early to decipher trends
NIM for the quarter was at 3.5% vs. 3.4% in Q1FY18. These are restated numbers under INDAS, but reported a decline vs.
I-GAAP came from the netting of interest expense of ZCBs, grossing of fees among others. NII grew 21.9% y-o-y. On a reported basis, retail loan spreads were at 1.91% and corporate loan spreads at 3.14%. Funding mix changed in favour of term loans.

Core PPoP growth was strong
NII grew 21.9% y-o-y. Loan growth picked up in the quarter, registering 18.6% y-o-y growth. Individual home loans grew 19.1% and corporate home loans grew 17.3%. Operating expenses (includes commissions) inched up owing to higher fair value adjustments of ESOPs and other CSR expenses. Core PPOP growth was 17.9% y-o-y.

 

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