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India Equity Research Reports, IPO and Stock News
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HDFC (HDFC)
Banks/Financial Institutions
Performance in line; slowdown and competition pose risks. HDFC reported 20%
earnings growth (in line with estimates). Its loan growth declined to 19% yoy (from
22% in 1QFY12) on the back of 18% growth in approvals; NIMs (as per our
calculations) improved qoq. We believe that increase in competition and slowdown in
the housing sector pose contingent risks at the current juncture. At 4X PBR FY2013E,
we believe that the risk-return trade-off may not be in favor of investors. We tweak
estimates, retain REDUCE with price target of Rs725.
Earnings in line
HDFC reported PAT of Rs9.7 bn, up 20% yoy and 1% above estimates. Capital gains and dividend
income were higher than estimates and core earnings were 4% below estimates.
Loan growth moderates, approvals grow by 15% yoy
HDFC reported 19% growth in balance sheet loans. Loans under management were up 20% yoy;
growth in non-retail loans was marginally higher, while individual loans under management were
up 19% yoy. A likely slowdown in large towns and cities affected HDFC’s incremental business.
HDFC’s loan approvals were up 15% yoy and disbursements were up 18% yoy.
Reported spreads stable, calculated NIM up
HDFC reported spreads of 2.3% – stable qoq. NIM (as per our calculations) increased to 3.7% in
2QFY12 from 3.2% in 1QFY12 (3.8% in 2QFY11) likely due to higher asset yields. While the qoq
improvement in NIM is positive, borrowing cost has clearly not yet peaked out.
Last week, HDFC launched a festive offer with 25 bps discounts on home loans – we believe that
this discount offer will increase pressure on incremental margins. We expect NIM to remain under
pressure over the next 1-2 quarters before interest rates in the system peak out.
Competition – a risk to growth and margins
We find early signals of increasing competition in the housing finance sector. ICICI Bank seems to
be back in the mode of setting market trends: ICICI Bank launched a fix-floating product last
month; HDFC followed up with a similar product after a fortnight.
For about three years, ICICI Bank followed HDFC in home-loan pricing. However, ICICI
Bank’s home-loan rates are marginally (25 bps) below HDFC’s for the past two months. At
the MHCI exhibition, ICICI Bank offered a further discount of 25 bps on home loans;
processing fees were also reduced by 50%. Thus, ICICI Bank’s effective home-loan rates
were 50 bps lower than HDFC home loans. Last week (post the MHCI exhibition), HDFC
introduced a festive discount of 25 bps to its card rates. Thus, the difference between ICICI
Bank and HDFC rates has now again narrowed down to 25 bps.
Standard asset provisions adjusted from reserves
HDFC utilized Rs2.5 bn from its additional reserves to meet standard asset provisions notified
by NHB in August 2011. Housing finance companies now need to maintain standard asset
provisions of 40 bps – in line with banks. As of September 2011, HDFC had excess
provisions of Rs3.3 bn on its balance sheet. HDFC made provisions of Rs4.4 bn on dual rate
home loans (@2%) and Rs7.5 bn as provision on other standard assets.
SOTP-based target price of Rs725; retain REDUCE
Our SOTP-based target price works out to Rs725/share (no change). In our fair value
estimate, we value HDFC’s mortgage business at Rs438/share – 3.9X core PBR and 15 core
PER FY2013E for normalized RoEs of about 26-30% (2% core RoA and leverage of 13-15X).
Recapitulating our views from our sector note dated October 10, 2011
High real estate prices disappoints consumers, keep sales low
�� Our recent real estate conference visits (REIFBS and MCHI) and channel checks indicate
that the slowdown/moderation in real estate sales is clearly visible. This is largely a metro
city and/or high-ticket phenomenon with customers probably deferring purchases due to
media reports of an imminent price correction. Demand in Tier-2 and Tier-3 cities has held
up better primarily because prices are perceived to be within an affordable range.
�� Developers, however, are keeping ’stated‘ prices constant while select discounts are
available on a ’one-on-one basis‘ to potential buyers. We have not seen any meaningful
(>10%) price correction.
�� Regulatory risks remain high leading to delays in launches in Mumbai and Chennai, but
also help restrict supply which is providing a support to residential prices.
Removal of home-loan prepayment rate poses risks to NIM
RBI has indicated a move to remove pre-payment penalty on home loans. We believe this
will further increase competitive intensity in the housing loan market, thereby exerting
pressure on NIMs. Home loans are currently offered at 10.5-11% while existing home loan
customers pay up to 12.5%. While housing finance companies reports spread of 2-2.2%,
we estimate that interest spreads on new home loans is close to 0.5-0.75%; existing home
loan portfolio earns 1.25-1.5% higher while developer loans earn spread of 4-4.5%. The
removal of pre-payment charges (typically at 2% of loan amount) will likely encourage
existing home loan customers to switch between housing finance companies for better
home loan rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC (HDFC)
Banks/Financial Institutions
Performance in line; slowdown and competition pose risks. HDFC reported 20%
earnings growth (in line with estimates). Its loan growth declined to 19% yoy (from
22% in 1QFY12) on the back of 18% growth in approvals; NIMs (as per our
calculations) improved qoq. We believe that increase in competition and slowdown in
the housing sector pose contingent risks at the current juncture. At 4X PBR FY2013E,
we believe that the risk-return trade-off may not be in favor of investors. We tweak
estimates, retain REDUCE with price target of Rs725.
Earnings in line
HDFC reported PAT of Rs9.7 bn, up 20% yoy and 1% above estimates. Capital gains and dividend
income were higher than estimates and core earnings were 4% below estimates.
Loan growth moderates, approvals grow by 15% yoy
HDFC reported 19% growth in balance sheet loans. Loans under management were up 20% yoy;
growth in non-retail loans was marginally higher, while individual loans under management were
up 19% yoy. A likely slowdown in large towns and cities affected HDFC’s incremental business.
HDFC’s loan approvals were up 15% yoy and disbursements were up 18% yoy.
Reported spreads stable, calculated NIM up
HDFC reported spreads of 2.3% – stable qoq. NIM (as per our calculations) increased to 3.7% in
2QFY12 from 3.2% in 1QFY12 (3.8% in 2QFY11) likely due to higher asset yields. While the qoq
improvement in NIM is positive, borrowing cost has clearly not yet peaked out.
Last week, HDFC launched a festive offer with 25 bps discounts on home loans – we believe that
this discount offer will increase pressure on incremental margins. We expect NIM to remain under
pressure over the next 1-2 quarters before interest rates in the system peak out.
Competition – a risk to growth and margins
We find early signals of increasing competition in the housing finance sector. ICICI Bank seems to
be back in the mode of setting market trends: ICICI Bank launched a fix-floating product last
month; HDFC followed up with a similar product after a fortnight.
For about three years, ICICI Bank followed HDFC in home-loan pricing. However, ICICI
Bank’s home-loan rates are marginally (25 bps) below HDFC’s for the past two months. At
the MHCI exhibition, ICICI Bank offered a further discount of 25 bps on home loans;
processing fees were also reduced by 50%. Thus, ICICI Bank’s effective home-loan rates
were 50 bps lower than HDFC home loans. Last week (post the MHCI exhibition), HDFC
introduced a festive discount of 25 bps to its card rates. Thus, the difference between ICICI
Bank and HDFC rates has now again narrowed down to 25 bps.
Standard asset provisions adjusted from reserves
HDFC utilized Rs2.5 bn from its additional reserves to meet standard asset provisions notified
by NHB in August 2011. Housing finance companies now need to maintain standard asset
provisions of 40 bps – in line with banks. As of September 2011, HDFC had excess
provisions of Rs3.3 bn on its balance sheet. HDFC made provisions of Rs4.4 bn on dual rate
home loans (@2%) and Rs7.5 bn as provision on other standard assets.
SOTP-based target price of Rs725; retain REDUCE
Our SOTP-based target price works out to Rs725/share (no change). In our fair value
estimate, we value HDFC’s mortgage business at Rs438/share – 3.9X core PBR and 15 core
PER FY2013E for normalized RoEs of about 26-30% (2% core RoA and leverage of 13-15X).
Recapitulating our views from our sector note dated October 10, 2011
High real estate prices disappoints consumers, keep sales low
�� Our recent real estate conference visits (REIFBS and MCHI) and channel checks indicate
that the slowdown/moderation in real estate sales is clearly visible. This is largely a metro
city and/or high-ticket phenomenon with customers probably deferring purchases due to
media reports of an imminent price correction. Demand in Tier-2 and Tier-3 cities has held
up better primarily because prices are perceived to be within an affordable range.
�� Developers, however, are keeping ’stated‘ prices constant while select discounts are
available on a ’one-on-one basis‘ to potential buyers. We have not seen any meaningful
(>10%) price correction.
�� Regulatory risks remain high leading to delays in launches in Mumbai and Chennai, but
also help restrict supply which is providing a support to residential prices.
Removal of home-loan prepayment rate poses risks to NIM
RBI has indicated a move to remove pre-payment penalty on home loans. We believe this
will further increase competitive intensity in the housing loan market, thereby exerting
pressure on NIMs. Home loans are currently offered at 10.5-11% while existing home loan
customers pay up to 12.5%. While housing finance companies reports spread of 2-2.2%,
we estimate that interest spreads on new home loans is close to 0.5-0.75%; existing home
loan portfolio earns 1.25-1.5% higher while developer loans earn spread of 4-4.5%. The
removal of pre-payment charges (typically at 2% of loan amount) will likely encourage
existing home loan customers to switch between housing finance companies for better
home loan rates.
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