Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Majority ownership by, and strategic importance to HDFC Bank:

HDBFS is of strategic importance to the bank (HDFC Bank) as it complements the latter's product portfolio, distribution network, and also supports the collection activities for the retail portfolio of HDFC Bank. The shared logo also enhances the moral obligation of HDFC Bank towards this entity. The company also benefits from regular funding support from HDFC Bank, in the form of equity and debt.

Established presence in the retail finance segment:

HDBFS has emerged as one of the larger players in the retail financing space, over the past few years. The Asset under Management stood at Rs 70,084 crore as on March 30, 2023 (Rs 61,444 crore, as on March 31, 2022).

HDBFS has a diversified product base with commercial vehicle/construction equipment (CV/CE) financing comprising 43% of the AUM as on March 31, 2023, loan against property comprising 26%, business loans being 24%. HDBFS has now expanded into consumer durable financing, gold loans, digital products loans and other related segments and its share has increased to 7% of the AUM as on March 31, 2023, from 3% as on March 31, 2019. Apart from its traditional focus on the self-employed segment in non-metros, the company has now widened its reach to the metros as well.

Healthy capital position:

Capitalisation remains healthy, as reflected in Tier-1 capital adequacy ratio (CAR) and overall CAR of 15.91% and 20.05% respectively as on March 31, 2023 (15.22% and 20.22% as on March 31, 2022). Reported Net worth stood at around Rs 11,437 crore as on March 31, 2023, as against Rs 9,540 crore as on March 31, 2022, while gearing stood stable at 4.8 times and 5.1 times during similar period. Capital position is supported by healthy internal accruals. Cushion for asset side risks was adequate, as reflected in net worth coverage for net non-performing assets (NPAs) at around 17 times as on March 31, 2023.

While capital generation remains comfortable, the capital profile is also aided by ability to raise capital from the parent (HDFC Bank) as and when required.

Weakness:

Ability to maintain asset quality and profitability remains monitorable:

HDBFS’s gross stage III assets reduced to 2.7% as on March 31, 2023, as against 5% as on March 31, 2022 (4.5% as on March 31, 2022). The company’s restructured book has also reduced substantially to ~0.7% of the AUM as on March 31, 2023, from 7.14% as on March 31, 2022. The reduction is supported by writeoffs and lower slippages. The company has maintained stage III provision cover of 65% as on March 31, 2023. Further, Healthy collection efficiency levels and improved early buckets stage 1 and stage 2 asset levels, indicate steady asset quality going forward.

Improved trajectory in asset quality would limit credit costs and therefore support overall profitability going forward. The company’s Return on assets (RoA) improved to 3% for FY23 from 1.6% in fiscal 2022. This was driven by reduction in overall credit costs to 2% in fiscal 2023 from 4% in fiscal 2022 (5% in FY21).