HDFC: ‘Buy’ call stays with price target of Rs 3,300

By: |
July 06, 2021 3:57 AM

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’.

Other income of the bank grew 54.3% y-o-y at Rs 6,288.5 crore. The four components of other income were fees and commissions of Rs 3,885.4 crore, foreign exchange and derivatives revenue of Rs 1,198.7 crore, gain on sale or revaluation of investments of Rs 601.0 crore.Other income of the bank grew 54.3% y-o-y at Rs 6,288.5 crore. The four components of other income were fees and commissions of Rs 3,885.4 crore, foreign exchange and derivatives revenue of Rs 1,198.7 crore, gain on sale or revaluation of investments of Rs 601.0 crore.

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.

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