HDFC's bad loans increase in June quarter, but there's a silver lining

Growth trends still strong; it is well-capitalised, provision coverage is high

Mortgage major HDFC’s results for the June quarter (Q1FY22) were a mixed bag. Consolidated income from operations was Rs 30,990 crore, less than Rs 35,738 crore in Q4FY21 and slightly more than Rs 29,953 crore in Q1FY21.

Interest income from mortgages was Rs 10,957 crore, which was more than Rs 10,879 crore in Q4, but lower than Rs 11,168 crore a year ago. There were gains in the insurance business with income of Rs 10,057 crore, versus Rs 14,634 crore previous quarter and Rs 7,291 crore last year.

PAT (before minority interest) was Rs 5,311 crore, versus Rs 5,669 crore in Q4 and Rs 4,058 crore last year. Finance costs were stable at Rs 6,626 crore. Impairment was marked at Rs 686 crore, versus Rs 1,204 crore last year.

The profits are not directly comparable YoY. Differences include profit on sale of investments of Rs 263 crore, lower dividends at Rs 16 crore, and an effective tax rate of 23.1 per cent, as against 15.4 per cent last year.

Net interest income (NII) was Rs 4,147 crore, up 22.2 per cent YoY, and a marginal 2 per cent QoQ. The NII margin was around 3.7 per cent. Total AUM rose to Rs 5.74 trillion, from Rs 5.31 trillion last year. Individual loans comprise 78 per cent of AUM, and grew 14 per cent YoY, while total loan book was up 8 per cent. Individual loan disbursements grew 181 per cent YoY in Q1.

Gross non-performing assets (GNPA) were Rs 11,120 crore, about 2.24 per cent of the portfolio. This has risen QoQ from a GNPA ratio of 1.98 per cent. Loans restructured under the Reserve Bank of India’s Resolution Framework for Covid-19 were Rs 4,482 crore — about 0.9 per cent of the book. Of these, 38 per cent were individual loans. In regulatory terms, HDFC needs provisions at Rs 5,778 crore, with Rs 2,443 crore provisioning for standard assets and Rs 3,335 crore for NPAs. The provisions actually stood at Rs 13,189 crore.

The company says demand for home loans remains strong and disbursements rose in June, while April and May were impacted by the second wave of Covid-19. July saw highest-ever disbursements in a non-quarter-end month.

The capital adequacy ratio stood at 22 per cent, with tier-I capital of 21.3 per cent and tier-II capital of 0.7 per cent at end of June, well above regulatory requirements. Value investors will note that HDFC values listed investments at cost, not current market value. The unaccounted gains on listed investments in subsidiaries and associates is a whopping Rs 2.61 trillion.

A comparison with LIC Housing indicates that HDFC has done well. It has better profit margins, and lower impairment. HDFC has, however, underperformed the Nifty over the past 30 days and 12 months, when it has returned 36 per cent versus the Nifty’s 44 per cent.