MOSL: HDFC (Buy)-Core operating performance helped by pick-up in non-retail loans

​HDFC: Core operating performance helped by pick-up in non-retail loans

(HDFC IN, Mkt Cap USD39.9b, CMP INR1633, TP INR1900, 17% Upside, Buy)

• HDFC’s 1QFY18 core PBT growth of 15% YoY beat our estimates by 3%. Reported PAT missed our estimate by 3%, driven by marginally higher taxes. Continued pick-up in corporate loan growth (+7% QoQ, +22% YoY) helped HDFC to report healthy core income growth (+16% YoY; 6% beat).
• AUM increased 18% YoY to INR3.55t. Retail loan growth of 16% YoY was similar to growth seen in 4QFY17, but still short of the earlier growth rates of 17-18%. Corporate loans grew 22% YoY (+7% QoQ). We are encouraged by sustained pick-up in corporate loan growth over the past four quarters. Share of corporate loans increased 50bp QoQ to 27.7%.
• Asset quality deteriorated, with GNPA % at 1.12% v/s 0.8% a quarter ago, led by a rise in GNPA % in non-retail loans to 2.1% v/s 1.2% a quarter ago. HDFC recognized one large steel account (belonging to 12 cases referred to NCLT) of INR9.1b as NPA. It had already made contingent provisions on this account of INR2.75b in FY17, which were utilized in the quarter.
• Spreads improved by 3bp YoY to 2.29%, helped by mix shift toward non-retail loans (+100bp YoY to 28.5%) and benefit on cost of funds. Spreads were impacted (5bp, in our view) by non-recognition of interest on the two large corporate accounts slipped during last three quarters.