HFCs - Jul-Sep’23 Earnings Preview – Q2 to be softer compared to Q1

HFCs - Gaurav Jani - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Jul-Sep’23 Earnings Preview – Q2 to be softer compared to Q1

For coverage HFCs, AuM at Rs3.3trn could see growth at 1.6% QoQ compared to 0.5% in Q1’24 and +3.2% (likely) in case of housing segment for banks. NIM could decline by 25bps QoQ to 3.27% as LICHF could see some moderation in margins. Hence may see a fall of 4.9% QoQ. As policy rates have stabilized, NIM for HFCs could improve in FY24E since asset repricing would be faster as compared to liabilities. Disbursal run-rate of LICHF is the key monitorable especially given weak credit flows in the last few quarters.

Other income might see a slight recovery by 10% QoQ to Rs1.1bn, as Q1 is seasonally weak. This would be offset by a 10% QoQ rise in opex to Rs2.6bn. Hence overall PPoP could dip by 6.9% QoQ to Rs22.3bn. We see a 10bps QoQ rise in provisions to 59bps as LICHF could see a rise in credit costs while Canfin would recognize the Rs385mn fraud. PAT may decline by 12.2% QoQ to Rs14.2bn. CANFIN remains our preferred pick in HFCs.

§ Housing demand slightly slowing; H1 volumes crucial for FY24E growth: System housing demand (banks) is showing signs of slowing down as credit growth for Sep’23 could come in at ~14.0% YoY (15% YoY in Jun’23). Bank credit to HFCs is softening and Aug’23 saw muted growth of (average 14% YoY growth in FY23). Short term housing demand would be keenly watched and it is crucial that inflation is stable so that there are no further rate hikes. Q1 being generally soft, Q2 should see a higher disbursals and coverage HFCs could see a 31% increase in disbursals to Rs182bn. Hence we expect coverage HFCs to see AuM growth of 1.9% QoQ and 8.6% YoY to Rs3.3trn.

§ QoQ margin compression likely: Faster liability repricing following rate hikes dragged NIM for HFCs in FY23. We expect NIM to moderate for HFCs by 25bps QoQ to 3.27% as margins for LICHF could normalize in Q2. NIM increase for HFCs would depend on stable repo rates and assuming there are no further rate hikes, NIM for FY24E should higher than FY23.

§ Opex to increase in tandem with other income: Other income could see a 10% QoQ increase to Rs1.1bn as Q1 is usually weak for HFCs. This would be offset by 9.9% sequential rise in opex to Rs4.6bn. PPoP is set to fall by 6.9% QoQ to Rs22.38bn.

§ PAT might decline by 12.2% QoQ; provisions rise: Asset quality in terms of stage-3 is expected to moderate by 11bps QoQ to 4.23% as slippages would fall for LICHF. However, provisions could rise by 10bps QoQ to 59bps as LICHF could witness ageing related provisions while Canfin will recognize fraud of Rs385mn. PAT is set to come in at Rs14.2bn (-12.2% QoQ).

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