HDFC's 29% growth in retail loan book defies slowdown

Higher reliance on bank borrowing in Q2 impacts net interest income but trend likely to be reversed

Double-digit growth in times like this is elusive, unless one is looking at pharmaceutical or technology companies. Despite news on slowing property sales, mortgage major Housing Development Finance Corporation (HDFC) has reported double-digit growth in loan book and profit in the September quarter. The 22 per cent growth in HDFC's loan book (inclusive of loans sold) has been largely driven by a 29 per cent growth in the retail book. Loans to individuals grew 26 per cent in the second quarter, after adjusting for loans sold. Adjusting for loans sold, HDFC's loan book has grown by 19 per cent year-on-year (y-o-y). Asset quality, too, has remained stable and is not showing any sign of stress, at least in the individual segment.

Keki Mistry, chief executive officer of HDFC, says the loan growth has been driven by the salaried class and the average loan amount during the quarter is Rs 21.9 lakh, which has remained stable sequentially. However unbelievable it may sound, a lot of salaried Indians are buying homes, even in these tough times, and HDFC expects to increase its loan book by 18-20 per cent in the foreseeable future. The market was disappointed by HDFC's net interest income (NII) of Rs 1,460 crore, as consensus estimates were factoring in Rs 1,590 crore. According to Emkay Global, the lower-than-expected NII was driven by 11 basis point sequential contraction in calculated net interest margins (NIM) versus its expectations of flat NIMs. "Driven by lower NII, the operating profit at Rs 1,650 crore was lower against consensus estimates of Rs 1,730 crore."

The decline in NII was driven by the higher interest expenses, which HDFC believes will come down over the coming quarters. During the quarter, the mortgage major has had to rely on bank borrowing rather than bonds, which is why its profitability has been affected. Mistry expects this to change and NIMs to remain above four per cent and spreads at 2.3 per cent levels. Operating income and pre-provisioning profit has grown at 10 per cent and nine per cent y-o-y, respectively. However, analysts broadly believe there is little upside left, as valuations are rich. Angel Broking, which has a neutral rating on the stock, says given the challenging macro developments, within the banking, financial services and insurance space, defensive names such as HDFC might not underperform the rest of the sector.