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Spark Capital - HDFC 2QFY14 Result Review: Performance in line; Headwinds gathering momentum: Maintain SELL




Spark Capital Advisors(India) Private Limited


22 Oct 2013





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HDFC 2QFY14 Result Review: Performance in line; Headwinds gathering momentum: Maintain SELL HDFC’s 2QFY14 results were in line with our expectations on loan growth and asset quality with a marginal negative on margins. Individual loan book growth (inclusive of loans sold) stood at 29% yoy continuing to drive loan growth. Corporate loan book growth remained weak accounting for only 20% of incremental qoq loan growth (9% for H1FY14). Individual loans including those sold to HDFC Bank now contribute ~70% of the book compared to 67% in Q2FY13. Loan spreads contracted marginally to 2.24% due to higher cost of funds and lower proportion of corporate loan book. Asset quality deteriorated marginally on account of increase in GNPAs in the corporate loan book. GNPA ratio moved up from 1.08% in 1QFY14 to 1.19% in 2QFY14. With recent NHB circular of creation of separate CRE-residential segment and reduction in risk weights for housing loans in line with RBI’s action in Q1FY14, there is capital relief on ~9% of the balance sheet; provisioning requirement has also coming down by ~Rs. 450 mn. Softening real estate prices, increasing competition and reduction in regulatory arbitrages between HFCs and banks continue to remain the top reasons for us being negative on the housing finance business. Real estate market continues to remain soft with NHB Residex dropping qoq in 22 of the 26 cities it covers in Q1FY14. Given the weak corporate loan growth coupled with higher defaults banks have become more aggressive on housing loans side bringing down the credit spreads. RBI modal base rate is down 50bps while home loan rates are down by 100bps in last 5 quarters. We continue to believe 6% tier-1 capital requirement for mono line lending business is low compared to 8% tier-1 capital requirement under Basel III for banks which have more diversified asset base. We believe valuations do not reflect the above concerns. Maintain our SELL rating with a TP of Rs. 720.

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