HDFC's loan growth remains low

Slow increase in non-individual loans a drag on overall growth

Housing finance major HDFC’s reported net profit of Rs 2,607 crore for the quarter ended March (Q4FY16), up 40 per cent year-on-year (y-o-y), was way ahead of Bloomberg consensus estimate of Rs 2,303 crore. However, one-offs like profit on sale of stake in its life insurance business to Standard Life of Rs 1,520 crore, lower tax rate and additional provisioning of Rs 450 crore distort the picture. Adjusting for these one-offs, HDFC's Q4FY16 numbers were largely in line, say analysts.

The key concern for analysts though is that HDFC's assets under management (AUM) continues to grow at a slow pace. Including the loans sold off to HDFC Bank (which gives a realistic trend) AUM growth has come down from 20 per cent in FY13 to 15 per cent now. Part of this slowdown can be attributed to the slowing economy, given that its closest peer LIC Housing Finance has also seen a similar trend. For HDFC, slowing growth of non-individual loans (27 per cent of AUM), which grew nine per cent, also played a role and offset the 24 per cent growth posted by the individual segment.

Suresh Ganapathy, financials analyst, Macquarie Capital, says, “HDFC's loan growth has been pretty weak, not just on the reported basis which is lower because of sell down (of loans) to HDFC Bank. Weak corporate loan growth along with slower retail AUM growth (net of loans sold), which has come down from 20 per cent in the past to 17 per cent, are key pressure points.” Growth concerns on the stock have not abated yet, he adds.

This slowdown is also reflected in the fact that this is the third straight quarter of sub-10 per cent net interest income (NII; the difference between interest earned and interest expended) growth for HDFC. NII grew by just seven per cent y-o-y to Rs 2,629 crore in the quarter.

The management, though, remains confident on future prospects. “We believe our growth will be similar to what we have seen in the past. Individual loans have grown at a healthy rate and that will continue. Non-individual loans can be volatile in terms of growth. We are seeing some uptick there and we hope it continues,” says Keki M Mistry, vice chairman and chief executive officer, HDFC. If that is the case, sentiments could get a boost.

Among other operational aspects, HDFC's spreads are expected to remain in the tight band of 2.2 to 2.35 per cent and asset quality remains strong with gross non-performing assets at just 0.7 per cent of advances. Excess provisioning of around Rs 700 crore (over Reserve Bank of India requirements) should take care of incremental stress, if any.