HDFC beats expectations in Q3; conservative provisioning offers comfort

Housing Development Finance Corporation’s (HDFC’s) December 2019 quarter (Q3) results beat the Street’s expectations on most operating parameters. While the housing financier major clocked over 3 times year-on-year (YoY) jump in its profit before tax to Rs 9,143 crore, its assets under management (AUM, which indicates the loan book size) grew 14 per cent. Analysts had pegged these two numbers at Rs 4,803 crore and 12-15 per cent, respectively. One-time gains of Rs 9,019 crore on account of stake sale in Gruh Finance —HDFC’s erstwhile affordable housing arm — fueled its profits.
 
Net profit improvement of about 4 times YoY was also driven by lower corporation tax, thus not comparable with the year-ago quarter. Net interest income (difference between interest earned and expense) growth of 9 per cent YoY to Rs 3,239.9 crore was better than analyst expectations of around 8 per cent. Though HDFC’s net interest margin of 3.3 per cent was down by 10 basis points YoY, it was at par with analyst estimates.
 

However, gross non-performing assets (NPAs) or bad loans continued an upward march, albeit marginally. The shadow housing banker’s gross NPAs inched up to 1.36 per cent in Q3, from 1.33 per cent in the previous quarter. The individual loan segment, which contributed to over 72 per cent of its gross loan book, too, witnessed a rise. From 0.73 per cent in the September quarter, the individual loan NPAs stood at 0.75 per cent in Q3. According to an analyst from a domestic research firm, “There is nothing to worry about individual NPAs. However, one should keenly watch the trend in non-individual NPAs, given the prolonged pain the real estate space.” HDFC’s conservative provisioning gives strong comfort. The company has utilised part of its one-time gains from Gruh stake sale to bump up its provisioning cover. It provided Rs 2,995 crore towards expected credit losses against Rs 116 crore a year ago. Its stage 3 (NPA under IND AS) provision cover stands at 49 per cent. Further, HDFC has also lowered its exposure in the construction and corporate segments to 16 per cent in Q3 from 27-28 per cent in the past.
 
Overall, the Street will take HDFC’s Q3 results positively amid the ongoing economic slowdown, while the near-term asset quality trend will be crucial in the coming quarters.