Key takeaway: HDFC’s annual report for FY21 shows 67% of new stage-3 loans came from stage-2 & backtesting of FY22e shows buffer. Besides stage-3 loans of 2.3%, .4% of loan have been in debt-asset swap. Retail approvals rose by 10%, led by 9% rise in ticket size volume-uptick would be important now. Mr Parekh raises pointers on restructuring & asset-mix norms. Rise in equity/asset from 9% to 15% more than FY17-21 is a drag on core ROE even as core ROA rose releveraging would lift ROE. ‘buy’.
Backtesting of NPL estimate assets acquired against loans: In FY21, HDFC’s stage 3 loans rose by 13% YoY to 2.3% of loans. 67% of gross addition have been from stage 2 loans & mainly from corporate loans. Hence, it is relevant to track trend in stage-2 loans as properly and these are at 6.3% of loans (5.8% if adjusted for exposure to Shapoorji Group) vs. 5.5% on Mar-20. Backtesting of FY22 stage-3 forecasts with trends for FY21 indicate some buffer in forecasts. Other important trends have been (1) HDFC has acquired assets worth `18 billion (.4% of loans) in satisfaction of claims (20% in investments & 80% in physical assets) and (2) NPL ratios in choose corporate segments are higher 15-27%, but these are modest % of corporate loans — all round corp. NPL ratio is at 4.8%.
Retail drives development & brings down RWA/asset reduced funding expenses support spreads: Retail loans rose by 12% YoY and whilst approvals have been up 10% YoY, it was driven by 9% rise in typical ticket size reflecting robust demand in completed projects & from larger-revenue customers. With 78% of housing loans originating from salaried class customers, HDFC would be improved placed to advantage from improved revenue/ savings pool for this segment. Corporate loan development (4% in FY21) could boost as drag from repayments by REITs evens out. With rise in share of retail loans, RWA/ asset ratio fell by 400bps YoY to 70%.
Better leverage to help ROE ‘buy’ stays: Over FY17-21, rise in core equity/ asset from 9% to 15% dragged ROE from 19% to 13% even as core ROA rose from 1.7% to 1.9%. Uptick in development really should support optimise leverage & drive ROE expansion. Valuations at 2.1x 1-year forward adjusted. P/B are at 10% disc vs 5-year typical. Our ‘buy’ contact stays with price tag target of Rs 3,300/ share with worth of lending small business at 2.6x Jun-23E adj. PB.
Funding robust ALM improved balanced: During FY21, all round borrowing rose by 5% YoY driven by development in deposits and bonds. Deposits formed 34% of total funds — 65% of retail deposits get renewed and retail customers contribute 65% of deposits. The gap in between fixed-floating liabilities is also lowest in a lot of years and ALM-profile is balanced.
Highlights from Mr. Parekh’s letter & MD&A: Mr. Parekh highlights a couple of recos. in context of regulations: (1) flagging that regulators shouldn’t see reset in lending prices as restructuring of loans, and (2) adjusting norms on asset/loan mix for liquid assets. For HDFC, share of indvl housing loans in total are ahead of targets set for Mar-24 (54-55% vs. 50%), but share of housing loan in total asset at 58% is a tad reduced than target of 60% by Mar-24.