HDFC Ltd's Q3FY20 results (Outperformer) - Corporate asset quality holds up well amidst fears

Q3FY20 result highlights

• HDFC’s PAT of Rs84bn grew 111% yoy and 296% qoq. The company booked one-time income of Rs90bn on fair value gains of GRUH consequent to its merger with Bandhan Bank. As per the company’s stated policy, one-third of these gains were earmarked as provisions in 3Q which explains the huge qoq jump in provisions from 8bn to 30bn.
• AUM growth of 14% yoy and 3% qoq was similar to 1Q /2Q. Individual loans grew 16% yoy / 4% qoq in line with the previous quarter while non-individual loan growth remained low at 6% yoy though better than 3% in 2Q.
• Ex assignment income (assignment income is booked upfront in INDAS), NII grew 17% yoy / 10% qoq which is higher than 12% yoy in 2Q.  Including loans sold, NII grew 12% yoy (5% in 2Q). The improvement in NII growth compared to 2Q was driven by an improvement in calculated NIMs as cost of funds declined. Reported spread stayed stable qoq at 2.27%. Calculated spread including loans sold, improved 9bps qoq. Excluding loans sold down, calculated spread improved considerably by 18bps qoq and 16bps yoy. The spread improvement was driven by a decline in cost of funds.
• Operating expenses declined 4% yoy and 9% qoq due to lower establishment expenses. Fees grew 10% yoy while surplus from liquid funds declined 12% yoy. Fair value gains from GRUH were Rs90bn.
• Excluding dividends/capital gains/fair value gains, core PPOP grew 7% yoy / 6% qoq. Tax rate for the quarter was lower at 8% due to fair value gains.
• Contrary to market fears, HDFC’s asset quality remained exceptionally strong especially on the developer portfolio where the street was expecting higher NPLs. Net increase in non-retail NPLs was low at Rs1.5bn similar to that of retail loans. Non-individual GNPA ratio rose marginally from 2.87% to 2.91% while retail NPLs remained stable at 0.75%. With additional provisions earmarked from fair value gains, stage 3 PCR rose to 49% from 43% while PCR for stage1+2 rose to 1.5% from 1.05%.

Valuation and view

With stress in residential real estate and funding constraints for HFCs, we believe only a few strong players will survive and HDFC leads that pack. We maintain OP led by HDFC’s strong liquidity position, stable AUM growth and strong show on developer asset quality in 3Q. We upgrade TP to Rs2,760 as we revalue subs and assign a higher multiple of 2.8x (earlier 2.7x) to the core business, given HDFC’s strengthening position in the HFC/NBFC space.