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| HDFC: Spreads stable |
| Vishal Chhabria / Mumbai Oct 14, 2009, 01:06 IST |
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Yields have come under pressure due to competition from public sector banks in the retail mortgage space.
 HDFC’s performance for the September 2009 quarter was ahead of the Street's expectations. But its net interest income (NII), the difference between interest earned and expended, was down marginally by about a percentage point. Although interest rates have been on a decline in the last few quarters, a key reason for the subdued NII growth, it seems the cuts in lending rate for customers have been faster than the decline in borrowing costs for the company in recent months. Analysts also point to the increased competition from public sector banks in the retail mortgage space among the reasons for pressure on yields.
However, the company was able to sustain spreads at around 2.2 per cent, which is within its five-year range of 2.15-2.25 per cent. Analysts say that since spreads are stable, and reflect how the company is managing its cost of funds, it provides comfort and the fluctuation in quarterly numbers, is thus, not a major concern.
Gross non-performing loans (NPLs) were also down nine basis points to 0.94 per cent of the loan portfolio, most of which has been provided for. The company says this is the 19th consecutive quarter with NPLs being lower than the corresponding previous year’s quarter, all of which indicates that asset quality remains healthy.
To an extent, HDFC’s performance was boosted by a sharp 172 per cent y-o-y increase in profit on sale of investments to Rs 61 crore. Other operating income, namely, dividend and fee income and surplus from deployment of money with mutual funds, also more than doubled to Rs 210 crore. The core fund-based performance was not exciting, though.
With operating expenses down 250 basis points and tax outgo up just 10 per cent, net profits were up 24.3 per cent y-o-y in Q2. Going ahead, with demand from the residential segment showing signs of improvement, expect HDFC’s numbers for core fund-based income to improve, and net profit growth to sustain around 18-20 per cent. The company believes it should be able to sustain a growth of about 20 per cent in loan sanctions and disbursals (adjusted for loans sold), which were up 18 per cent and 29 per cent, respectively, on a y-o-y basis. The stock has moved in line with the broader market since July 2009 and looks fairly valued at Rs 2,758.
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