The second quarter for HDFC, the nation’s largest mortgage lender, was compliant on all fronts. NII/Core PPOP was up 3.6%/4% QoQ while NIM (reported) was flat QoQ at 3.4%. This is mainly due to the lag in the transmission of rate hikes (due to the quarterly reset), which we believe is largely transitory and should normalize. Assets under management (AUM) growth improved to 16% year-on-year, with individual AUMs up around 20% year-on-year. Non-individual loan growth remained weak due to prepayments and the resolution of troubled assets. Asset quality remained favorable with core prudential standards (Baseline Prudential Standards) down to 1.6% (-19 bps q/q); the cost of credit remained low at 28 basis points. HDFC continues to gain market share in basic mortgages, despite increased competitive intensity.
As HDFC’s distribution strength is likely to increase, we remain confident of continued market share acceleration. Additionally, HDFC’s low cyclicality in NIMs and strong asset quality further support our view. Based on our assumptions, the base valuation at 1.7x the pound Sep-24F seems undemanding. We maintain our buy rating and TP based on SOTP of Rs 2,850, implying core mortgage business is valued at 2x Sep-24F book and subsidiary valuation of Rs 1,417a apart after adjustment for discount 20% off holdco.
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Growth trends remain robust
- Assets under management increased by 3%/16% year-on-year to reach Rs 6.903 billion.
- Individual disbursements increased by 36% YoY in HY23, driving individual assets under management to grow 4%/20% qt/y to 5.608bn. Management indicated that housing disbursements accounted for 93% of total disbursements.
- Management indicated that demand for individual home loans remains strong in the mid- and high-value real estate segments across all geographies.
- In the second quarter of FY23, approximately 23% of individual disbursements were to customers in the economically weaker section and lower income groups.
- The non-individual loan portfolio declined by 3.1% quarter-on-quarter to 1.295 billion rupees. This was due to prepayments and the resolution of some troubled assets in the segment.
- However, management stressed that it has a good pipeline for construction finance loans and LRD loans, and expects the non-individual portfolio to see strong growth in the coming quarters. In 1H23, it was mainly personal loans that contributed to the growth in assets under management. As a result, the mix increased to 81.2% from 79.1% in March 22.
- HDFC continues to gain market share in basic mortgages despite increased competitive intensity. With the likely increase in distribution strength of HDFC, we expect the market share to further accelerate.
- The early repayment rate for individual loans was 10.3%, in line with average levels in the sector.
- As of 2QFY23, the company provided loans worth 950 billion to HDFC Bank.
- Of its total loans, about TN 1.2 qualified for priority sector status.
- The average ticket size was around 3.5 million (compared to 3.3 million in Sep 22). ~92% of new loan applications were received digitally. Metropolitan and Tier 1 cities have seen better growth, which has led to an increase in the amount of loans.
- Individual loans are reset quarterly beginning with the month of disbursement.
- HDFC further increased lending rates for all loans by 50 basis points from October 1.
- Individual loan collection efficiency was >99% for 1HFY23.
- The Competition Commission of India has approved the merger plan and in accordance with the order of the NLCT (Mumbai), the shareholders’ meeting has been announced.
- For the transfer of the non-individual portfolio from HDFC Limited to HDFC Bank, the company requested certain forbearance.
- Management stressed that loans that do not meet the conditions to be transferred to the bank are not substantial.