HDFC Ltd's Q4FY19 results (Outperformer) - Strong earnings and asset quality

Q4FY19 results highlights

• HDFC’s PAT of Rs29bn grew 27% yoy and 35% qoq and was 2 % higher than our estimate. Strong growth in retail loans, stable spreads and sound asset quality were the key drivers.
• AUM growth remained strong at 15% yoy and 5% qoq. On-book individual loans grew 14% yoy while individual loans sold down grew 2.9x 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 13% yoy and 11% qoq while including loans sold, NII grew 12% yoy and 3% qoq.
• Reported spread stayed stable qoq at 2.30%. Calculated spread including loans sold down remained flat qoq and rose 18bps yoy. Even, excluding loans sold down, calculated spread improved 21bp qoq and 18 bps yoy. On a qoq basis spread improved due to lower cost of funds while on a yoy basis spread improved due to higher yields.
• Operating expenses declined qoq and yoy as ESOP charges dropped sharply. HDFC booked trading gains of Rs3.2bn and dividend income of Rs5.4bn mostly from HDFC Bank.
• Excluding dividends/capital gains/income from surplus funds/ fair value gains on investments, core PPOP grew strongly at 28% yoy and 6% qoq. The yoy growth of 28% was driven by a 12% growth in NII and a sharp drop in operating expenses on the back of lower ESOP charges. 
• Gross stage 3 loans remained stable qoq rising 2%. Stage 3 coverage ratio improved to 44% from 40% qoq. The expected credit loss as % of exposure at default is at 1.44% at end 4Q19 versus 1.33% qoq. While last quarter in 3Q19,  a developer loan of Rs3.3bn slipped, in 4Q there was no major developer slippage. Exposure to the Jet BKC office space that has been reported in newspapers was standard in 4Q and will be auctioned this week. HDFC’s total exposure is Rs4.2bn and the reserve price for the auction is Rs2.45bn

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 roll over TP to Rs2300 where we have valued the core housing business at 2.5x.