Creating buffers in a challenging quarter. HDFC’s growth in the retail business slowed down due to the lockdown. The company used large capital gains from stake-sale in the insurance business to further boost its ECL buffers.
During a challenging quarter, a sharp decline in borrowing cost is positive. Even as near-term NII will likely remain muted and the overhang of slippages remains high, HDFC’s large provisioning buffers put it in a much more comfortable position versus peers to sail through these challenging times.
HDFC used the entire capital gains of Rs 12 billion from 1.7% stake-sale in HDFC Life to boost ECL. The company has now increased ECL coverage to 2.6% of loan book from 1.6% in 1QFY20 and 2.4% in 4QFY20, higher than most peers, even as its corporate and construction finance book declined 400 bps y-o-y to 17% of total loans. Even as Covid-19 will add to the current woes of the real estate sector, HDFC’s large buffers provide comfort.
HDFC reported about 500 bps q-o-q reduction in loans under moratorium to 22.4%; the decline was mostly in the individual segment (16.6% of loans) from 22.6% q-o-q. While directionally the trend is positive, with expected volatility in monthly collections, we don’t read much into this. We would find some risk in about 2.3% of the individual loan book; HDFC highlighted that 5% of individuals who opted for the moratorium (0.8% of total individual loan book) faced job losses and 9% (1.5% of total individual loan book) faced business closures.
Moratorium on the non-individual loan book decreased marginally to 39%, down 150 bps q-o-q. With already large stress in the real estate sector, coupled with COVID-related challenges, HDFC has continued to make large ECL provisions.
We are cutting our core PBT estimated by 2-3% to reflect marginally lower NIM due to the transmission of lower interest rates to home loan borrowers even as loan growth inches up a bit. We are not building any capital gains for the next nine months and marginal gains thereafter; high growth in dividend income for FY2021E is normalization on a low base of FY2020.
Our thesis on HDFC remains unchanged – post-IL&FS, HDFC is a preferred borrower in the bond markets making its liability side competitive, its strategy to refrain from aggressive real estate loans has paid off with a significantly superior book and large balance sheet buffers, HDFC will likely emerge as the only large NBFC in the real estate lending markets; this will boost NIM and core RoE to about 16-18%, from mid-teen levels and its high-quality subsidiaries will continue to deliver superior growth.
(With inputs from FinancialExpress)