HDFC Ltd's Q3FY19 results (Outperformer) - Strong loan growth, developer NPLs rise

Q3FY19 result highlights

• HDFC’s PAT of Rs21bn was slightly higher than our estimate and declined 60% yoy and 14% qoq. The sharp yoy and qoq decline in PAT is because of lumpy gains from stake sales and dividend from HDBK in 2Q. Despite the environment being tough for NBFCs particularly HFCs, HDFC delivered strong AUM growth and stable margins. However asset quality deteriorated with a 12% qoq increase in stage 3 loans due to slippage in developer loans.
• AUM growth remained strong at 15% yoy and 3% qoq. On-book individual loans grew 14% yoy while individual loans sold down grew 26% yoy driving a growth of 17% in total individual AUMs. Growth in developer loans was subdued at 8% yoy.
• Under Ind AS income from loans assigned has to be booked upfront against amortization under IND GAAP. This will add an element of volatility to NII as loans sold to HDBK will vary. Ex assignment income, NII grew 11% yoy while including loans sold, NII grew 16% yoy..
• Reported spread stayed stable qoq at 2.26%. Calculated spread including loans sold down rose 4bps qoq. Even, excluding loans sold down, calculated spread improved 18bp qoq as yields rose faster than cost of funds. In the funding mix, the share of term loans and deposits has risen while debentures have declined.
• Operating expenses declined qoq and yoy as ESOP charges dropped sharply. There was a steep decline in profit on sale of investments both qoq and yoy which dragged down overall non-interest income and PAT.
• Excluding dividends/capital gains/income from surplus funds, core PPOP grew 24% yoy.
• Gross stage 3 loans rose 12% qoq due to fresh developer NPLs in 3Q. Principal value of developer NPLs added in 3Q wasRs3.3bn. Stage 3 coverage ratio has remained stable at 40%. The expected credit loss as % of exposure at default is at 1.33% at end 3Q19 versus 1.31% qoq.

Valuation and view

We maintain OP driven by strong operating performance and HDFC’s strong liquidity position. However we believe developer NPLs remain a key monitorable in the quarters ahead given the stress in the segment. We maintain TP of Rs2020 where we have valued the core housing business at 2.3x.