HDFC Q1 Review: Analysts Expect NIM To Pick Up As Rate Transmission Improves

HDFC missed Q1 profit estimates due to slower transmission of interest rates. But NIMs are expected to pick up this year.

<div class="paragraphs"><p>Indian five hundred rupee banknotes arranged for photograph.&nbsp;(Photo: Vijay Sartape/ BQ Prime)</p></div>
Indian five hundred rupee banknotes arranged for photograph. (Photo: Vijay Sartape/ BQ Prime)

India's largest mortgage lender is expected to see an improvement in net interest margin as it raises lending rates in the rest of the financial year, according to analysts.

Strong loan growth and healthy provisions are other key positives for Housing Development Finance Corp. this year, they said in their post-earnings research reports.

HDFC reported net profit worth Rs 3,669 crore for the quarter ended June, up 22% year-on-year, even as core income grew slower than expected. The earnings, however, missed the consensus estimate of Rs 3,883.5 crore. Its net interest income for the quarter rose 7.8% from a year ago to Rs 4,447 crore. Assets under management rose 17% to Rs 6.71 lakh crore.

After the sale of loans, HDFC's total advances portfolio stood at Rs 5.81 lakh crore as on June 30.

  • Individual loans, excluding the loans sold, were at Rs 4.47 lakh crore, up 19% year-on-year.

  • Non-individual loans on the book rose 4.7% to Rs 1.28 lakh crore.

The home financier's asset quality improved during the period. Its gross non-performing asset ratio fell 13 basis points sequentially to 1.78%. Credit costs remained stable at 0.33% quarter-on-quarter.

The company's expected credit loss charged to the statement of profit for the quarter stood at Rs 514 crore, down 25% from a year earlier.

All the 29 analysts tracking HDFC recommend a 'buy', according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 23.8%.

Here's what analysts made of HDFC's Q1 FY23 results.

Morgan Stanley

  • Individual AUM growth reach a multi-year high.

  • NII growth was muted owing to some transient factors and should pick up.

  • Provisioning was elevated, though management expects it to moderate with asset quality improving.

  • Lag in transmission of lending rates - until recently, individual loans had a quarterly repricing clause, due to which the asset portfolio reprices with a lag. Management has changed its policy for new loans to a monthly re-pricing clause.

  • Cost-to-income was elevated at 10.7% for Q1FY23, but management has guided for it to be in single digits for FY23.

  • Trim headline and core earnings per share estimates by 2% and 3% respectively for FY23.

Credit Suisse

  • While wholesale growth was muted, management attributed this to stronger repayments and recoveries.

  • HDFC is seeing strong pipeline for growth in both individual as well as wholesale segments.

  • NIMs should improve in the next few quarters.

  • Operational expenditure was up 15% QoQ, driven by higher retail activity as it looked to increase branches and staff strength to cater to the rising demand.

  • Asset quality trends remained strong, NPAs declining 5% QoQ to 1.8%, led by moderation in wholesale NPAs.

  • Restructured loans remained stable at 80 basis points and management remains confident on asset quality trends.

ICICI Securities

  • Lagged rate transmission effect and modest income from surplus liquidity moderated HDFC’s NII growth in Q1 FY23 to 8% YoY.

  • With quarterly reset of back-book loans and monthly reset of incremental loans, expect NIM as well as NII growth to retrace.

  • Management expects NIMs to sustain near 3.5%.

  • Demand for home loans and pipeline of loan applications remain strong across segments.

  • Estimate AUM growth of 17% and 18% for FY23 and FY24, respectively.

  • With improved real estate sentiment and normalisation of collection efficiency, estimate stage-3 assets at 2.0% and 1.8% for FY23 and FY24, respectively.

  • Benefit of higher operational expenditure is likely to be seen in the next few quarters. Overall, management expects the cost-to-income ratio to be in single digit for FY23.

Motilal Oswal

  • Expects margin to recover over the remainder of FY23.

  • Expects credit costs to moderate from hereon. Estimates credit costs of 30 basis points and 25 basis points for FY23 and FY24, respectively.

  • Expects HDFC to deliver an AUM and net profit compounded annual growth rate of 14% each over FY22-24, which will translate into a core return on asset and return on equity of 2% and 14% in FY23 and FY24 respectively.

  • Cuts FY23 EPS estimate by 3% to factor in lower reported margin in Q1.