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HDFC (HDFC)
Banks/Financial Institutions
Steady quarter but outlook challenging. HDFC reported PAT of Rs8.9 bn, up 33%
yoy, aided by capital gains of Rs1.7bn. Core earnings were up 20%—largely in line.
Disbursement growth at 21% yoy and loan growth at 20% yoy in 3Q remained strong
and on track. However, we find higher interest rates, ongoing competition and likely
moderating demand as headwinds in the medium term, even as valuations remain
expensive. We revise estimates, retain REDUCE with price target of Rs690 (from Rs720).
Core earnings in line, incremental trends in business may be weaker
HDFC’s core earnings (PBT before capital gains and extraordinary items) were up 20% yoy and 4%
below estimates. Moderate loan growth at 20% yoy and stable margins (reported spreads stable
at 2.3%) supported earnings growth. The company sold down loans worth Rs21.5 bn during the
quarter. Loan growth including loans outside balance sheet (Rs116 bn) was 23% yoy;
disbursements were up 21% yoy. Retail loans (including loans sold down) were up 25% yoy.
However, a higher base and likely moderating demand is now affecting incremental growth—
retail disbursements were up 38% yoy for 9MFY11, down from 62% in 1QFY11 and 42% in
1HFY11. We are modeling overall loan growth of 21% for FY2011E and FY2012E as compared to
23% in 3QFY11.
High borrowing rates are a concern
We are modeling 10-20 bps compression in margins for HDFC over the next four quarters to factor
higher rise in borrowings cost.
` The current tight liquidity in the system has put significant pressure on bulk borrowing rates,
primarily at the shorter end on the yield curve—interest rates below one year are up by about
4% from April 2010 levels.
` HDFC’s reported spreads of 2.3% in 3QFY11 are stable qoq. The company raised lending rates
from September 2010 and followed by another hike of 50-75 bps in December 2010 in order
to support its spreads.
` Our economist expects liquidity to ease out though still remain in the deficit model by March
2011E. In this context, we believe that bulk borrowers like HDFC will likely face margin pressure
or may have to raise lending rates that has risk of pricing them out.
` Despite rising interest rates, the retail lending business remains competitive. HDFC’s home
loan rates are significantly higher than SBI. Post December 2010, HDFC has revised home
loan rates for new customers at 9.5% for loans up to Rs3 mn, 9.75% for loans between
Rs3 mn and Rs7.5 mn, and 10% for loans above Rs7.5 mn. SBI currently offers teaser
loans at 8.5% in the first year and 9.25% in the second and third year. Notably, in
4QFY10, the effective interest rates offered by SBI and HDFC were similar.
` We believe that the negotiating power of HDFC (and other companies engaged in
developer funding) has increased considerably post the bribes-for-loan scam. According
to sources, developers are finding it challenging to raise loans from PSU banks. This might
be somewhat positive for HDFC's margin, though risks in this business remain high.
Other highlights
Provision for teaser loans. NHB has prescribed standard asset provision of 2% on teaser
loans—in line with RBI’s policy. Accordingly, HDFC utilized Rs2.72 bn from its reserves for
the same. The total provisioning requirement was about Rs4.2 bn and the balance was
adjusted largely through excess provisions.
Stake in IL&FS sold down. HDFC has sold about 10% of its holding in IL&FS and has
recognized capital gains of Rs1.7 bn on the same.
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