HDFC: the call “Buy” remains with a price target of Rs 3,300
Bottom Line: HDFC’s annual report for FY21 shows that 67% of new Stage 3 loans came from Stage 2 and backtesting the FY22 show buffer. In addition to the Phase 3 loans of 2.3%, 0.4% of the loans were in exchange for debt and assets. Retail approvals increased 10%, driven by a 9% increase in ticket sizes; increasing the volume would be the key now. Mr Parekh raised points on restructuring and asset allocation standards. The increase in equity / assets from 9% to 15% during the 2017-21 financial year is a brake on the basic ROE even if the basic ROA has increased; debt would increase ROE. ‘buy’.
Backtesting of the NPL estimate; Assets Acquired for Loans: In FY21, HDFC Phase 3 loans increased 13% year-on-year to 2.3% of loans. 67% of the gross addition came from Phase 2 loans and mainly from business loans. Therefore, it is also relevant to follow the trend of stage 2 loans and these represent 6.3% of loans (5.8% if adjusted for exposure to Shapoorji group) against 5.5% on March 20. . Backtesting the FY 22 Phase 3 forecast with the trends for FY 21 indicates some buffer in the forecast. Other key trends were (1) HDFC acquired assets worth $ 18 billion (0.4% of loans) in claims settlement (20% in investments and 80% in physical assets) and (2) ratios of NPL in some business segments are high 15 -27%, but these are low% of business loans – corp. The NPL ratio is 4.8%.
Retail stimulates growth and reduces RWA / assets; Lower financing costs help spread: Personal loans grew 12% yoy, and although approvals increased 10% yoy, they were driven by a 9% increase in average ticket size reflecting high demand in completed projects and from high income customers. With 78% of home loans coming from salaried class customers, HDFC would be in a better position to benefit from a better income / savings pool for this segment. Business loan growth (4% in FY21) could improve as the slowdown in REIT repayments eases. With the increase in the share of loans to individuals, the RWA / asset ratio fell from 400bp year-on-year to 70%.
Better leverage to help ROE; “Purchase” stays: during fiscal year 17-21, the increase in equity / core assets from 9% to 15% increased the ROE from 19% to 13% even though the core ROA fell from 1.7% to 1.9%. An increase in growth should help maximize leverage and drive ROE expansion. Valuations at 2.1x 1 year adjusted over time. P / B are 10% disk vs. 5-year average. Our call to buy remains with a target price of Rs 3,300 / share with a loan activity value of 2.6x Jun-23E adj. PB.
Solid funding; Better Balanced ALM: During FY21, global borrowing increased 5% year-on-year thanks to growth in deposits and bonds. Deposits accounted for 34% of total funds – 65% of retail deposits are renewed and retail customers contribute 65% of deposits. The gap between fixed and floating liabilities is also the lowest in many years and the ALM profile is balanced.
Highlights from Mr. Parekh’s letter and management report: Mr. Parekh underlines a few remarks. in the context of regulation: (1) signal that regulators should not view lending rate resets as loan restructuring, and (2) adjust asset / loan mix standards for liquid assets. For HDFC, the share of indvl home loans in total is ahead of the targets set for March 24 (54-55% vs. 50%), but the share of home loans in total assets at 58% is a little lower to the 60% target by March 24.