Rating: buy: HDFC: Steady loan growth continues, margins stable

Disbursement growth, in retail business, was low at 2.4% y-o-y in Q3

HDFC Bank (1)

Housing Development Finance Corporation (HDFC) continues to report steady individual home loan growth (up 19% y-o-y) while disbursement growth was muted this quarter. Even as its funding costs have been rising faster than other NBFCs, margins were stable q-o-q and y-o-y  as HDFC has been smoothly passing on hikes to its borrowers. Asset quality continues to improve steadily. Retain Buy; FV of `3,050 (pegged with HDFC Bank).

Disbursements take a pause, we remain assertive

HDFC continues to deliver steady loan growth in retail business, up 19% y-o-y.  Disbursement growth, in this segment, was low at 2.4% y-o-y in Q3FY23 (16% in Q2FY23), raising some concerns on future growth trajectory. We however believe that business in previous year was fueled by pent-up demand that is now normalising. We have not seen any major signs of slowdown in the real estate sector. With prices being stable, affordability remains strong. We hence remain assertive on real estate volumes for HDFC and other HFCs in the salaried/prime markets. We expect steady mid-to-high teen growth in this segment to continue. Smaller HFCs, in the affordable space, are delivering high growth by penetrating into newer geographies.

Moderate and steady improvement in asset quality

HDFC continues to deliver steady improvements in asset quality performance although the pace of improvement has now moderated. Stressed loans in the individual segment declined to 2.3% from 2.4% in Q2FY23, a tad slower than 30bps sequential decline in Q2. Stressed loans in the non-individual segment declined to 12.6% from 12.7% in Q2FY23 and 13.3% in Q1FY23 – a part of which is explained by higher write-offs in Q2FY23. The company continues to carry ECL coverage of 2.2%, down from 2.6% in Q2FY22. HDFC had padded up its balance sheet from sale of stake in insurance and AMC businesses, which provided buffer during stressed years and Covid. We expect HDFC’s management to reverse the same over time or during merger with the bank.

Revise estimates; retain Buy – pegged with HDFC Bank

We are revising up our estimates by 1-6% to reflect better-than-expected margins due to better-than-expected transmission of interest rates. Rate transmission on the asset and liability side has been faster for HDFC as compared to other peers due to (i) monthly repricing of MCLR-linked loans and daily MTM on swaps and (ii) rapid rise in home loan rates by competition (banks) that are linked to external benchmarks. We are moderating growth estimates, mostly extending weak non-individual business trajectory this year; this segment remains challenging to predict. We retain Buy rating with FV of `3,050 (`2,940 earlier), pegged with FV of HDFC Bank.

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First published on: 06-02-2023 at 04:10 IST