HDFC: Q2 operationally in line, one-off gains offset by credit loss

While expected credit loss was due to IL&FS, the company created additional buffer out of exceptional income

Housing Development Finance Corporation's (HDFC) September quarter (Q2) numbers, announced on Thursday, are in line with the Street’s estimates to some extent. 

Net profit grew 24.7 per cent year-on-year (YoY) to Rs 24.7 billion, against a Bloomberg analysts’ poll of Rs 24.3 billion. Even its loan book growth of 17 per cent to Rs 3.8 trillion was within the 17-21 per cent range in the last five quarters, though a tad lower than 18 per cent growth anticipated by analysts. 

Net interest income (NII), too, grew 16 per cent YoY to Rs 26.3 billion. However, a sharp rise in expected credit loss (ECL — provisioning towards bad loans on the basis of expected default probability) worried investors. The stock slipped 0.4 per cent to Rs 1,762 as a result. HDFC reported a sharp YoY rise in ECL to Rs 4 billion in Q2. Of this, about a third or Rs 1.4 billion was due to exposure to IL&FS; the account, however, is standard as on date. 
 

HDFC, in line with its practice, created additional provisioning buffer for potential loan losses. This, however, partly offset the exceptional gain of Rs 10 billion it made by selling its stake in subsidiary HDFC Asset Management Company.

Analysts believe the move is positive, considering the prevailing market scenario. In addition, HDFC’s exposure to IL&FS is around Rs 3.9 billion, which is just 0.1 per cent of its loan book as of September 2018. 

Therefore, it should not impact earnings materially even if the entire exposure goes bad, assuming the worst case scenario. 

Even for the overall construction loan book (4 per cent of the total loan book), the management is confident in terms of asset quality. “Given the long history and experience in the real estate sector and the strict due diligence process of HDFC, we believe the risk of a significant part of the construction book turning bad is low,” said an analyst not wanting to be named.  

Besides, another challenge housing financiers are facing is in terms of profitability, given the liquidity issue. However, HDFC’s reported spread of 2.3 per cent is within the historical range of 2.20-2.35 per cent, and at par with the preceding and the year-ago quarters. Moreover, liquidity is unlikely to be a challenge given its highest credit rating of AAA and support from its banking arm HDFC Bank.