HDFC Q1 net profit jumps 53.7%: Surge in NPA ratio not worrisome

HDFC reported good operational performance for Q1, with assets under management growing 18 per cent year-on-year

Housing Development Financial Corporation (HDFC)’s June quarter (Q1) results, at first glance, may startle investors given the surge in its non-performing assets (NPA or bad loan) ratio.

But, as analysts say, it is due to change in accounting. Nevertheless, its provisioning coverage ratio (PCR), too, is at comforting levels and operating performance remains healthy. Thus, most analysts remain positive on the stock, and see any correction as an entry opportunity.

To start with, HDFC reported good operational performance for Q1, with assets under management (AUM; loan book) growing 18 per cent year-on-year, and net interest income (NII) and net profit rising 21.7 per cent to Rs 31.2 billion and 53.7 per cent to Rs 21.9 billion, year-on-year, respectively. Even after adjusting for dividends received from HDFC Bank, recurring net profit would have been up 25 per cent year-on-year.

While the stock slipped over a per cent before closing 0.8 per cent down at Rs 2,028.05, some analysts attribute it to correction or profit-booking, given the 14 per cent gains in past two months.

Some others, though, believe that the rise in NPAs weighed a bit on sentiment. Yet, that may not be enough to make the Street nervous. Like other finance companies, HDFC too adopted IND-AS accounting norms in Q1, encompassing a stricter method of NPA recognition. 

Thus, in Q1, HDFC’s stage-3 accounts (a category under IND-AS comprising NPAs and stressed assets) rose to 3.7 per cent of its AUM, as compared to 2.6 per cent in the June 2017 quarter, and 1.1 per cent as of March 2018 (latter two as per previous accounting method). 

“Unlike earlier accounting norms, HDFC, under IND-AS, had to consider NPAs from its securitised/off-book loans (HDFC sells a portion of its loans to HDFC Bank), which resulted in more stage-3 loans. However, provisions are not required for such NPAs. We do not consider this as worrisome,” says Asutosh Kumar Mishra, analyst at Reliance Securities, who also believes HDFC’s strong provision coverage ratio (PCR) provides additional comfort. 

Though the first quarter PCR figures are not comparable (but indicate good health), as of March 2018, HDFC had provisions of 1.4 per cent of its loans against the regulatory requirement of just 0.76 per cent. As a result, HDFC’s provisions plunged by 88 per cent in Q1 to Rs 197 million, pushing up its net profit. 

With this, analysts also do not see any significant rise in provisioning going forward. Moreover, HDFC’s about 95 per cent of AUM is under stage-1 (an IND-AS category denoting standard assets; up to 30-day defaults). 

Importantly, analysts say the growth momentum is building up, and that will drive earnings.