Despite few misses, loan book growth helps HDFC ride through a tough year

Profitability and asset quality passed the test of difficult operating conditions; loan growth remains key to buck the trend

Housing Development Finance Corporation or HDFC, the market baron in housing loans, posted a decent March-quarter (Q4) result, with numbers largely ahead of expectations on all counts. As numbers exceeded estimates, the stock rose over 1 per cent on Monday despite it being a turbulent day of trade.

Net interest income at Rs 3,161 crore grew by 19 per cent year-on-year, while net profit -- despite higher tax costs, and due to gains from the sale of subsidiaries -- grew by 27 per cent year-on-year to Rs 2,862 crore. Bucking the underlying weakness in the industry, HDFC posted 12 per cent loan growth and 17 per cent assets under management (AUM) growth year-on-year. However, compared to its own benchmark, analysts say these numbers have slipped below the historical trend. “For those used to 18 per cent-plus growth, Q4 is a disappointment. Yet, if the Street reacted positively, it was because it expected a larger slowdown in growth,” says an analyst with a domestic brokerage.

The rising share of retail loans is also a key positive. The financier managed to expand the share of retail loans from 70 per cent in FY18 to 71 per cent in Q4. Also, individual loans grew faster at 17 per cent, and analysts believe the strategy to focus more on retail loans and be conservative on developer book should hedge HDFC against asset quality pressures. “Q4 growth indicates market share augmenting for HDFC and despite competition from public sector banks, growth is strong, though it has come at the cost of profitability,” says Shweta Daptadar of Prabhudas Lilladher. Profitability measured as net interest margin was maintained at 3.3 per cent, largely helped by non-retail loans where spread expanded by 7 basis points (bps) to 3.17 per cent, while the retail segment’s spread stayed at 1.9 per cent.

While the asset quality did see some pressure on retail and non-retail fronts – up 6 bps and 16 bps, respectively, in Q4, at 1.2 per cent overall gross non-performing assets (NPA) ratio, investors don’t have much to worry yet. However, sustaining the loan growth momentum becomes extremely important for HDFC in FY20 to stay unaffected on all parameters.