HDFC disappointed on lower NIMs for the quarter as management curtailed lending in non-individual segment owing to heightened asset quality risks. Indeed NPLs across individual & corporate segment have steadily inched higher. Still, we believe HDFC is better shielded, has strong distribution and cost of funds advantage. Lower PT to `2,310. Maintain Buy. The readacross for the broader NBFC/HFC, however, should be cautious.
Individual loan growth steady, caution in corporate term loan growth
Gross loans grew at 12.1% y-o-y, individual (retail) loan +13.8% y-o-y, non-individual loans +7.3% y-o-y. Loan AUM (net of provisions) at the end of Q4 was
`4.6 trn, registering 14.7% y-o-y growth, individual loan AUM (net) +17.1%. Management went slow on the corporate/ developer loans given the unfavourable lending environment, tight liquidity conditions, over leverage and corporate debt rating downgrades leading to heightened risks across the corporate sector.
Asset quality stable, coverage increased
Stage 3 assets decreased to 1.41%, 3 bps sequential improvement. Gross NPL for the quarter was 1.18%, 4 bps lower q-o-q. GNPL in the developer loan segment decreased 12 bps q-o-q to 2.34% while GNPL in the individual segment was stable q-o-q at 0.70%. ECL provision coverage for Stage 3 assets was 44% (40% in Q3) and Stage 1 & 2 assets was 84 bps (77 bps in Q3).
Mix shift away from non-individual loans led to q-o-q margin decline
NIM (reported) for FY19 was 3.3% (including assignment income) and 3.1% (excluding assignment income) vs 3.5% and 3.2% respectively for 9MFY19. Moreover, the sequential decline in margins, ~30-40 bps q-o-q can primarily be attributed to the lower mix of corporate term loans. On a reported basis, retail loan spreads were at 1.97% and corporate loan spreads at 3.44% for FY19. Funding mix changed in favour of term loans (21.3% of the mix, vs 15% as of FY18), primarily replacing the market borrowings (49.8% of the mix vs 57% as of FY18).
Core PPoP grew 31.1% y-o-y
Core PPoP (excluding trading gains & dividend income) grew 31.1% y-o-y. Non-Interest Income (NII) grew y-o-y due to one-time gains w.r.t proceeds from stake sale in GRUH Finance of `3.2 bn and lower operating costs primarily due to lower ESOP expenses for the quarter.
Tweaking our estimates
We lower NIMs in line with FY18 & FY19 reported numbers, pricing up the income from securitisation as sell-down of loan picks up, leaving bottom line fairly flat vs prior expectations. We forecast AuM CAGR of 14.3% and BVPS (standalone) CAGR of 17.2% over FY19-22e.
Valuation and historical trends
On a standalone basis, HDFC trades at 4.4x BV Mar’19 and 32.0x EPS Mar’20e versus 10-year average of 5.3x and 24.3x, respectively. We value HDFC at `2,310 based on SOTP, as the underlying businesses are anchored at different multiples. We value core mortgage business at 3.1x BV, HDFC Bank & HDFC Standard Life at published PT of `2,685 and `350, respectively, and GRUH at 5.0x P/B, HDFC ERGO at 20% premium to last deal value and AMC at 8% of AuM. Risks: downside — Weak volumes, asset quality worries; Upside — better volume & NIM.