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MOSL:HDFC: NIM compression transitory, expect it to recover

• HDFC reported a PAT of INR36.7b in 1QFY23 (8% miss), up 22% YoY. It reported a NIM compression of ~10bp YoY and 30bp QoQ at 3.4%. Credit costs rose ~7bp QoQ to ~36bp.
• Disbursements in the Individual segment grew 66% YoY to ~INR420b. Individual/total AUM rose 20%/17% YoY. The management guided at a strong pipeline in Non-Individual segment, which will translate into healthy AUM growth.
• With the merger announced, taking a view in isolation is difficult, but we feel that HDFC continues to have a strong ‘Right to Win’ in its standalone Mortgage business. We maintain our Buy rating on the stock with a TP of INR2,830 (premised on Mar’24E SoTP).

 

Transmission lag led to compression in NIM, efforts made to fix it

• NIM compression was due to: a) transmission lag in passing of higher borrowing costs, and b) absence of benefits of low rates on overnight interest swaps (OIS), which was present in 1QFY22.
• Adjusted for the one-time impact of the transmission lag and OIS, NII growth would have been 16% YoY (in line with AUM growth)
• HDFC has reduced the re-pricing frequency in incremental Retail lending to one-month from three-months.

 

Asset quality improved; credit cost should moderate from hereon

• Gross S2 + S3 (combined, 30+dpd) declined to 6.5% from 6.7% QoQ. GS3 fell 15bp QoQ to 2.1%. ECL/EAD declined by 8bp QoQ to 2.3%.
• GNPA fell by ~13bp QoQ to 1.8%, led by ~32bp decline in Non-Individual GNPA to 4.4%.
• Total restructured pool stood at 0.77% of AUM (v/s 0.8% as of 4QFY22).
• Asset quality should exhibit strengths and continue to improve. We model lower credit costs of ~30bp/25bp in FY23/FY24.

 

Merger on track; equity infusion in HDFCLIFE

• HDFC has received approval for the merger from RBI and is awaiting approvals from the CCI.
• From a regulatory perspective, HDFCLIFE wanted to increase its solvency ratio to over 200%. With this preferential issue of equity shares of INR20b, the shareholding of HDFC in HDFCLIFE will increase by 1%, but it will still remain below 50%.
• HDFC is awaiting clarity from RBI on whether it can increase its stake above 50% before the merger is consummated.

 

Highlights from the management commentary

• Cost-to-income ratio was higher because of the increased Retail business and expansion of the branch network. Increased legal costs also contributed to higher OPEX.
• The management said there is no evidence from the past to suggest that rising interest rates have resulted in higher delinquencies.
• Within Individual/Retail loans, the back book gets re-priced over a period of three months, while it happens with a lag of one month in Non-Individual loans.
• Dividend income is higher YoY due to dividend received from HDFC AMC, HDFCLIFE, and Credila. Dividend received from HDFCB will be recognized in 2QFY23.