Mr Parekh raises pointers on restructuring & asset-mix norms. Rise in equity/asset from 9% to 15% over FY17-21 is a drag on core ROE even as core ROA rose; releveraging would lift ROE. ‘buy’.
Key takeaway: HDFC’s annual report for FY21 shows 67% of new stage-3 loans came from stage-2 & backtesting of FY22e shows buffer. Besides stage-3 loans of 2.3%, 0.4% of loan were in debt-asset swap. Retail approvals rose by 10%, led by 9% rise in ticket size; volume-uptick would be key now. Mr Parekh raises pointers on restructuring & asset-mix norms. Rise in equity/asset from 9% to 15% over FY17-21 is a drag on core ROE even as core ROA rose; releveraging would lift ROE. ‘buy’.
Backtesting of NPL estimate; assets acquired against loans: In FY21, HDFC’s stage 3 loans rose by 13% YoY to 2.3% of loans. 67% of gross addition were from stage 2 loans & mostly from corporate loans. Hence, it’s relevant to track trend in stage-2 loans as well and these are at 6.3% of loans (5.8% if adjusted for exposure to Shapoorji Group) vs. 5.5% on Mar-20. Backtesting of FY22 stage-3 forecasts with trends for FY21 indicate some buffer in forecasts. Other key trends were (1) HDFC has acquired assets worth `18 billion (0.4% of loans) in satisfaction of claims (20% in investments & 80% in physical assets) and (2) NPL ratios in select corporate segments are high 15-27%, but these are small % of corporate loans — overall corp. NPL ratio is at 4.8%.
Retail drives growth & brings down RWA/asset; lower funding costs help spreads: Retail loans rose by 12% YoY and while approvals were up 10% YoY, it was driven by 9% rise in average ticket size reflecting strong demand in completed projects & from higher-income clients. With 78% of housing loans originating from salaried class clients, HDFC would be better placed to benefit from better income/ savings pool for this segment. Corporate loan growth (4% in FY21) could improve as drag from repayments by REITs evens out. With rise in share of retail loans, RWA/ asset ratio fell by 400bps YoY to 70%.
Better leverage to aid ROE; ‘buy’ stays: Over FY17-21, rise in core equity/ asset from 9% to 15% dragged ROE from 19% to 13% even as core ROA rose from 1.7% to 1.9%. Uptick in growth should help optimise leverage & drive ROE expansion. Valuations at 2.1x 1-year forward adjusted. P/B are at 10% disc vs 5-year average. Our ‘buy’ call stays with price target of Rs 3,300/ share with value of lending business at 2.6x Jun-23E adj. PB.
Funding strong; ALM better balanced: During FY21, overall borrowing rose by 5% YoY driven by growth in deposits and bonds. Deposits formed 34% of total funds — 65% of retail deposits get renewed and retail clients contribute 65% of deposits. The gap between fixed-floating liabilities is also lowest in many years and ALM-profile is balanced.
Highlights from Mr. Parekh’s letter & MD&A: Mr. Parekh highlights a few recos. in context of regulations: (1) flagging that regulators shouldn’t see reset in lending rates as restructuring of loans, and (2) adjusting norms on asset/loan mix for liquid assets. For HDFC, share of indvl housing loans in total are ahead of targets set for Mar-24 (54-55% vs. 50%), but share of housing loan in total asset at 58% is a tad lower than target of 60% by Mar-24.