Housing Development Finance Corporation or HDFC defied expectations and posted better than expected results in Q3FY22. Q3 results marked a recovery after the business hit a slump in Q1FY22 following the second wave of Covid. Gross NPAs fell 65 bps YoY to 2.32% while interest income improved 3% YoY to Rs 11,055 crore. HDFC’s operating expenses also fell marginally by 3% YoY to Rs 7,744 crore. Although it faced a few bumps on the way, with the change in regulation on NBFC classification, NPA norms, and liquidity norms, this housing finance company managed to surpass the street’s expectations. 

HDFC’s net profit grew 11% YoY to Rs 3,261 crore helped by a 12% YoY rise in total AUM (assets under management) to Rs 6.18 lakh crore. A moderate 7% YoY rise in net interest income to Rs 4,284 crore also helped boost the company’s profit during Q3 on a YoY basis. NIMs rose marginally to 3.6% in Q3FY22 from 3.4% in Q3FY21.

The lender’s operating profit went up by 3% YoY to Rs 10,953 crore. However, it fell 3% QoQ. This is because of a 50% QoQ fall in other income to Rs 773 crore on lower dividend income. Revenue from operations fell 4% QoQ to Rs 11,784 crore. The management expects a rise in demand for loans in Q4FY22.

AUM improves and individual loans dominate

Total AUM for Q3FY22 grew 12% YoY to Rs 6.18 lakh crore on strong demand for home loans. In the post earnings call, the management said that 30% of home loans approved came in from the economically weaker section (EWS). The average ticket size for loans disbursed to EWS is Rs 11.1 lakh. HDFC has a strong pipeline of home loan applications and the management is positive that demand will further increase. 

The management says that there was a considerable increase in demand in the affordable housing segment and even in high-end properties. In the past 12 months, Tier-2 cities, especially in Gujarat, are seeing a rise in demand for construction finance loans. 

The rise in AUM is also because of an increase in the average size of loans. The average size of an individual loan amounts to Rs 32.3 lakh compared to Rs 28.5 lakh in Q3FY21. The increase in ticket size is because of increased contribution from the higher income group. The higher income group is defined as customers with an annual family income of Rs 18 lakh or more. The contribution from this group increased to 44% from 40%. With the rise in AUM, HDFC’s collection efficiency also improved. Collection efficiency for individual loans stands at 98.9%.

Broadly, the total AUM mix is divided into individual loans and non-individual loans. The individual loan book consists of 79% of the total AUM mix. Under non-individual loans, construction finance consists of 9%, LRD (lease rental discounting) constitutes 7%, and corporate loans consist of 5% of the total AUM mix.

Individual loans are seeing a steep rise in loan approvals and disbursements. A report by SMC Online says approvals and disbursements grew 45% and 48%, respectively, at the end of December 2021 in Q3FY22. The rise is commendable as in Q3FY21, HDFC had the additional advantage from concessional stamp duty in certain states like Delhi, Karnataka, and Maharashtra which wasn't the case in Q3FY22. Without this benefit, the individual loan book grew 17% YoY to Rs 4.8 lakh crore in Q3FY22. 

The non-individual loan mix saw a marginal fall in growth by 2% to Rs 1.3 lakh crore. This may be because of slowness in the disbursement of loans in construction finance. The real estate sector is slowly reviving and demand for such loans started to pick up only in Q2FY22. Now, LRD disbursements are immediate, while in construction-finance disbursement happens in line with the construction progress, so the numbers are likely to reflect in Q4FY22 as disbursements increase. 

The management is positive about the growth of construction finance and LRDs as there are considerable loan applications in the pipeline. They expect this to reflect in the AUM growth for FY22. LRDs asset quality is quite superior compared to other loans; hence the scope of growth is what HDFC wants to tap into. 

RBI’s new rules for NPA classification mildly affects HDFC’s asset book 

RBI’s new rules for NPA classification did have an impact on HDFC’s asset book. Gross NPAs rose YoY by 41 bps to 2.32% from 1.91%. An NBFC’s asset quality is divided into Stage 1, Stage 2, and Stage 3. 

Stage 1 – assets that are standard and performing assets. Stage 2 assets are underperforming, which means there is an increase in risk portfolio since the time they were originally recognized. However, there is still no credit loss in Stage 2 loans. If the credit quality of these loans improves, they can be moved up to Stage 1 assets. Stage 3 assets are non-performing assets and therefore impaired. The repayment of these loans is doubtful, hence classified under the high-risk category.

Stage 3 assets define an NBFC’s asset quality. HDFC’s stage 3 assets increased to Rs 14,500 crore in Q3FY22, a rise of 32% YoY. 

This rise in gross NPA is simply an accounting change for now as rising NPAs did not lead to an increase in credit cost. The cost of funds for Q3FY22 stands at 5.78%, lower than Q3FY21 (6.39%).

Total provisions stand at Rs 13,195 crore, a 7% YoY increase. However, provisions see a marginal fall by 1% on a QoQ basis.

HDFC is working on stabilizing its assets and improving AUM

On the whole, HDFC’s loan mix sees steady growth and Q4FY22 will see better demand and growth in AUM as construction activities pick up. Considering the asset quality and understanding the stance of management, NPAs are likely to fall in Q4FY22 and continue to be better in FY23. Restructuring of loans comprised 1.34% of the entire loan book, out of which 64% were individual loans and 36% were non-individual loans. This helped improve collection efficiency, especially for individual loans to 98.9% in Q3FY22, causing revenues to increase. The management wants this trend to continue and reduce the restructured loans to 1.2% of the loan book in Q4FY22.  

HDFC is now looking forward to increasing its sales momentum in the home loan segment as demand may surge. According to a report by ICICI Securities, HDFC also needs to work towards meeting the RBI’s guidelines of home loan asset classification. These guidelines were given out by the RBI to define and differentiate NBFCs from housing finance companies. The guidelines say that for companies to be registered as HFCs, 60% of their total assets held should be routed towards housing finance. Currently, HDFC has 53% housing loans versus the necessary limit of 50%, and 57% individual loans versus the required guideline of 60% (short of 3%). HDFC is required to fulfill these criteria by March 2024. The management will need to restructure its loan mix to comply with the guidelines.

Analysts from Geojit Paribas see a steep recovery of HDFC since the second wave of the pandemic, especially in terms of collections and disbursements. Despite hurdles, HDFC’s AUM rose considerably. This reflects well on the growth of business and the management’s plans are guided on the same lines. A potential home loan pipeline lays down good grounds for loan growth. For now, utilization of surplus liquidity and adequate provisions is likely to speed up growth and asset quality for HDFC.