While robust demand in the individual segment boosted loan growth, a slight fall in the first quarter margins and asset quality need monitoring
India’s leading housing financier, Housing Devel-opment Finance Corpo-ration (HDFC), once again met Street expectations, reporting a net profit of 19 per cent, and as much rise in revenue for the quarter ended June. Strong growth in individual loans aided the growth in revenue. Driven by demand in the individual loan segment (up 23 per cent net of loans sold), the housing financier's loan growth stood at 19 per cent (net of loans sold to HDFC Bank), higher than the Street's expectation of 18 per cent.
If the loans sold (securitised) are included, loan growth stands at 23 per cent, in line with the historical range of 20-25 per cent. As individual loans account for a large chunk of its business, these trends indicate the company's business remains healthy.
Growth in loans to developers moderated to 14 per cent compared to the year-ago period (it stood at 19 per cent in the quarter ended March). The slowdown in real estate off-take, along with that in project launches, were the key reasons for the moderate growth, say analysts.
|In Rs crore
|Net interest income
|Y-o-Y change (%)
|Y-o-Y change (bps)
|Y-o-Y change (%)
|Net interest income is the difference between interest earned and paid E: Estimates (prior to results)
All figures are on standalone basis
Source: Company, analyst reports
During the quarter, loan approvals and disbursements grew a healthy 17 per cent and 20 per cent, respectively. However, margins and asset quality slipped marginally, and these remain key issues to be monitored. Any undesired slippage on this front could hurt the stock's premium valuation. On Wednesday, the company's shares closed at Rs 678.30 a share in the Bombay Stock Exchange, down 0.62 per cent, in line with the broader markets.
Margins, asset quality
On an annual basis, HDFC's gross non-performing loans (NPLs) declined, a trend seen during many quarters. Sequentially, however, the company recorded a slight uptick in gross NPLs (see chart). Analysts say the slowing economy could result in some pressure in the retail portfolio. Also, the fact that many developers face difficult conditions could add to it. The management, however, hopes to improve its asset quality.
HDFC’s net interest margin slipped by 36 basis points to four per cent in the quarter ended June, compared to the quarter ended March, while its spreads held on to the 2.27 per cent level. Analysts attribute these to lower loan yields. Vaibhav Agarwal, vice-president, (research-banking), Angel Broking, said, “HDFC has historically kept its spreads in a narrow band of 2.25 to 2.35. We believe the dip in margin was compensated by higher loan growth. The change in the mix of advances towards individual loans is also partly attributable to this dip.” While analysts are not perturbed about NPLs and margins, they would want to keep an eye on these.
Outlook & valuations
Most analysts expect the company to record stable growth in net interest income. They estimate the net interest margin at 3.8-4 per cent over the next two years. The company's focus on tier-II and tier-III cities would continue to support loan growth.
Analysts also believe re-pricing of its dual rate home loans worth Rs 22,300 crore would aid the company's margins in the coming quarters. Also, a reversal in provisioning on these loans could boost net worth.
From the asset quality and returns perspective, in a recent note on HDFC, analysts at Avendus Securities stated, "We forecast loan-loss provisions to the total assets at a three-year mean of 0.06 per cent during FY13-FY15, well below that of its peers. Sustainable high returns on asset ratio is the key driver of HDFC's premium valuation, compared to its peers. Strong profitability is likely to sustain the valuation premium."
Analysts say to some extent, these valuations are also helped by a higher demand for defensives. Agarwal says, “From current levels, from a 12-18 month perspective, once the (economic) cycle turns favourable, the stock is unlikely to give high beta returns. Hence, we are neutral on the stock. That said, in the near term, given the macro concerns, the stock would continue to command a weightage in defensive portfolios.”