HDFC's rising consumer loans are a positive

Total assets under management at Rs 3,11,264 cr, y-o-y growth of 16%, adjusted for loans sold or assigned

HDFC is known for springing very few surprises and it kept up with its tradition in September quarter also. Net interest income (Rs 2,496 crore) and net profit (Rs 1,826 crore) grew by 14 per cent each, and were in line with Street expectations. The one noticeable factor however is the 10 basis points shrinkage in net interest margin (NIM). As against the traditional range of 4 - 4.5 per cent, NIM in Q2 was at 3.8 per cent. NIM has started cooling-off from the March'16 quarter and have remained under pressure since then.

"The run-off of free funds in the form of equity is resulting in margins declining for HDFC", explains Suresh Ganapathy, analyst tracking the financials sector in Macquarie. Keki Mistry, Vice Chairman and CEO, HDFC, says "as we are borrowing more money, weighted average cost of liability will increase and NIMs tend to contract". However, the Street isn't attributing much concern to this factor for now, as loan growth remains buoyant. Total assets under management during the quarter stood at Rs 3,11,264 crore, posting a year-on-year growth of 16 per cent, adjusted for loans sold or assigned during the quarter (Rs 35,858 crore). If these loans sold are to be included, loan book grew 21 per cent year-on-year. A dissection of lending pattern indicates that fresh loans to individual (retail customers) grew 14 per cent to Rs 1,93,533 crore in Q2, while loans to non-individual borrowers (mainly realtors) posted 10 per cent growth (Rs 77,136 crore), compared to the year ago quarter.

The loan book now is more in favour of the retail portfolio, with individual loans now accounting for 70 per cent of total loans (this figure has been inching up in the past few quarters). "This is a positive development for HDFC as higher share of developer loan book was a major concern for the Street till FY16", says an analysts from a domestic brokerage. In fact, analysts say that the increasing share of retail loans should help HDFC maintain a good asset quality as risk of default is considered lower with retail loans. Provisioning for bad loans in Q2 stood at Rs 95 crore as against Rs 52 crore a year-ago. Gross non-performing assets (NPA) ratio were also muted at 0.76 per cent, more or less in line with the usual range of 0.5 - 0.75 per cent and mirroring the industry standards. On the whole, analysts say it was yet another quarter of steady performance from HDFC and they expect this run rate to continue, though they factor for some moderation in loan growth given the slowdown in the real estate sector.