HDFC is a preferred borrower in the bond markets making its liability side competitive, its strategy to refrain from aggressive real estate loans has paid off with significantly superior book and large balance sheet buffers.
Creating buffers in a challenging quarter. HDFC’s growth in the retail business slowed down due to the lockdown. The company used large capital gains from stake-sale in the insurance business to further boost its ECL buffers. In the midst of a challenging quarter, sharp decline in borrowing cost is a positive. Even as near-term NII will likely remain muted and overhang of slippages remains high, HDFC’s large provisioning buffers put it in a much more comfortable position versus peers to sail through these challenging times.
HDFC used the entire capital gains of Rs 12 billion from 1.7% stake-sale in HDFC Life to boost ECL. The company has now increased ECL coverage to 2.6% of loan book from 1.6% in 1QFY20 and 2.4% in 4QFY20, higher than most peers, even as its corporate and construction finance book declined 400 bps y-o-y to 17% of total loans. Even as Covid-19 will add to the current woes of the real estate sector, HDFC’s large buffers provide comfort.
HDFC reported about 500 bps q-o-q reduction in loans under moratorium to 22.4%; the decline was mostly in the individual segment (16.6% of loans) from 22.6% q-o-q. While directionally the trend is positive, with expected volatility in monthly collections, we don’t read much into this. We would find some risk in about 2.3% of the individual loan book; HDFC highlighted that 5% of individuals who opted for the moratorium (0.8% of total individual loan book) faced job losses and 9% (1.5% of total individual loan book) faced business closures.
Moratorium on the non-individual loan book decreased marginally to 39%, down 150 bps q-o-q. With already large stress in the real estate sector, coupled with Covid-related challenges, HDFC has continued to make large ECL provisions.
We are cutting our core PBT estimated by 2-3% to reflect marginally lower NIM due to transmission of lower interest rates to home loan borrowers even as loan growth inches up a bit. We are not building any capital gains for the next nine months and marginal gains thereafter; high growth in dividend income for FY2021E is normalisation on a low base of FY2020.
Our thesis on HDFC remains unchanged – post IL&FS, HDFC is a preferred borrower in the bond markets making its liability side competitive, its strategy to refrain from aggressive real estate loans has paid off with significantly superior book and large balance sheet buffers, HDFC will likely emerge as the only large NBFC in the real estate lending markets; this will boost NIM and core RoE to about 16-18%, from mid-teen levels and its high quality subsidiaries will continue to deliver superior growth.