HDFC rating: Buy | Margin pressure is likely to persist

HDFC’s core lending franchise is currently valued at 1.3x FY24e BVPS (adjusted for the value of its subsidiaries). The lending business of HDFC generates a core RoE of 12-13%. Impediments to an improvement in the core RoE are (i) incremental loan growth being driven by the individual segment, which is a low spread business; (ii) higher funding costs which could pressure NIM going forward; and (iii) the quantum of disbursements to the developer segment needed to materially change the AUM mix is difficult to fructify, in our view. Subsidiary values are also well discovered and are unlikely to drive a re-rating. We retain Buy with a target price of Rs 2,850 (from Rs 2,860). Downside risks: (i) Continued shift in AUM mix towards individual loans; (ii) higher-than-estimated sensitivity of funding costs; and (iii) lag in translating that into asset yields. We revise our FY23e/24e/25e EPS estimates by -3.0/-1.6/-1.0%: We lower our EPS estimates primarily to reflect higher pressure on NIM going forward. This would be due to higher funding costs going forward and a continuous structural increase in the proportion of individual loans in the overall AUM mix.

Key observations from Q1FY23 results

Reported NIMs fell to 3.4% (-10bps q-o-q) due to lag in transmission of increase in borrowing rates and corresponding rise in lending rates.

Highlights from commentary: HDFC has passed on the hike in repo rates of 90bps in its lending rate. NIMs were impacted due to a lag in transmission of increase in borrowing rates. With complete repricing of its loan book within the next three months, NIMs should revert to earlier levels. For incremental loans, HDFC has changed the loan contracts to 1-month reset. This should speed up translation of any increases in borrowing costs faster going forward.