HDFC’s core mortgage business reported stable net interest margins (NIM) and spreads of 3.3% and 2.3%, respectively. PBT (profit before tax) for 9MFY20 stood at `176.6 bn, up 87%
y-o-y and included fair value gain of `90.2 bn and profit of `35.2 bn on stake sale in Gruh Finance and consequent merger with Bandhan Bank. Individual AUM growth stood at 16.2% y-o-y and the non-individual AUM was up 6.2% y-o-y. While GNPA (I-GAAP) in the non-individual segment at 2.91%, was up only 4bps q-o-q, the company used the high profits in the quarter as an opportunity to improve the provisioning coverage (PCR) on Stage 3 (S3) assets to a healthy 49% (up 920bps y-o-y) and on S1 and S2 assets to 150bps (up ~73bps y-o-y). With an SoTP-based target price of `2,590 (earlier: `2,475) we maintain Add.
Fair value gain consequent to merger of Gruh Finance with Bandhan Bank HDFC reported a fair value gain of `90.2 bn in Q3FY20 consequent to merger of Gruh with Bandhan Bank. In H1FY20, HDFC had already reported profit on sale of stake in Gruh at `35.2 bn. HDFC used the extraordinary gains as an opportunity to improve the provisioning cover on its loan book. HDFC reported credit costs of `29.95 bn (annualised: 240bps) in Q3FY20 which was primarily towards higher provisions on S1, S2 and S3 assets. ECL provisions as a % of exposure at default (ECL/EAD) stood at 2.25%, up 50bps/92bps q-o-q/y-o-y.
Given the sluggishness in the real estate sector, we had anticipated that the asset quality in the non-individual segment would remain under pressure. Also, with the heightened uncertainties, HDFC continued to exercise caution and kept its disbursements muted in the developer segment. GNPA (I-GAAP) in the non-individual segment stood at 2.91%, up 4bps/45bps q-o-q/y-o-y while the reported asset quality in the individual segment (0.75%) remained broadly stable sequentially.
Affordable housing demand strong
Monthly approvals in the EWS and LIG segment was up from ~9,300 to ~9,400 with the average ticket size remaining the same in the EWS (`1.02 mn) and LIG segments (`1.76 mn). Monthly average approvals in value terms stood at `15 bn.
Valuations
We model an AUM CAGR of ~14% over FY19-FY22e given the slowing disbursements in the non-individual segment. We roll forward our valuation to Dec-2021 for the core mortgage business. A potential upside of ~8% comes with low business risks and risk adjusted relative valuations in the NBFC/HFC space. We maintain Add. Key downside risk is severe deterioration in the developer segment asset quality leading to higher credit costs.