HDFC’s profit after tax GREW 20% y-o-y to Rs 44.3 bn in Q4 of FY2022-23, which is 13% higher than the market expectations. Net interest margin (NIM) expanded by around 10 bps. The NIM for FY23 was reported at 3.6%, which is higher than the NIM reported in the first nine months of FY23. HDFC’s core pre-provisioning operating profit (PPoP) grew by 16% y-o-y to Rs 53.4 bn, indicating strong business performance. Credit costs increased by around 4 bps q-o-q to 29bps, indicating a slight increase in bad loans. HDFC’s disbursements in the individual segment were slightly below Rs 500 bn in Q4FY23. HDFC’s individual/total assets under management (AUM) rose 17%/11% y-o-y, with individual loans comprising 83% of AUM. This indicates that HDFC’s loan portfolio is dominated by individual loans, which are performing well.
The management shared that it has not witnessed any perceptible change in demand for mortgages, despite the high interest rates and that a large proportion of customers have seen only their tenor increase rather than any EMI increase. HDFC achieved its highest ever monthly disbursements in March 2023 and expects this positive momentum to continue throughout FY24. Commentary on the existing mortgage demand has been divergent across the different lenders in the mortgage ecosystem. HDFC continues to have a strong ‘right to win’ in its standalone mortgage business. We give our Buy rating with a target price of Rs 3,290.
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Effective management of transmission lag drives NIM expansion
Effective July 2022, HDFC had reduced the re-pricing frequency on freshly disbursed Retail loans to one month (from three-months earlier). However, on the back-book, one-third of the Retail book gets re-priced every month due to the quarterly reset. While the spreads were stable, the improvement in yields led to a sequential margin expansion of 10bp with FY23 NIM at 3.6%. With expectations of a near-end to the repo rate hike cycle, expect margins to stabilise over the next three to six months.
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Merger on track: Effective date likely to be around July 2023
Warrant holders of HDFC Ltd who were earlier eligible to receive HDFC Ltd shares if they exercised the warrants will now receive HDFC Bank shares in the same proportion as was announced at the time of the merger. Of the total loan book, Rs 1.1t will qualify for the priority sector lending (PSL) norms of HDFCB. Total statutory liquidity ratio (SLR) is Rs 630 bn-640bn [G-Sec+Cash] and the requirement from HDFC is for SLR of Rs 1t. We expect HDFC’s margin to remain stable over FY24/ FY25. With overall provisions at 2% of exposure at default (EAD), HDFC has made adequate provisions for any contingencies in asset quality. We have increased our FY25 EPS estimates by 2% to factor in lower credit costs.