Competition to cap HDFC stock price

Despite rate cuts, credit demand unlikely to improve meaningfully

After sector leader State Bank of India (SBI) cut lending rates over the weekend, most banks and housing finance companies (HFCs) have followed. Housing Development Finance Corporation (HDFC) also cut lending rates on Tuesday.

Rising competition in the segment has forced these cuts at a time when credit demand outlook continues to be bleak. These pressures could weigh on HDFC’s growth, margins and stock price movement in the near term, believe analysts.

Suresh Ganapathy, banking analyst at Macquarie Capital, says, “We believe HDFC will witness continued pressure on net interest income (NII) growth. Though lower rates could provide some uptick to credit offtake, it will not be meaningful, as demonetisation woes continue to weigh on the real estate sector.”

The HDFC management, though, is sticking to its long-term assets under management growth forecast of 15-18% a year. However, unlike its smaller peers in the affordable housing finance space, HDFC and larger HFCs might not benefit much from banks’ lending rate cuts. While bank borrowings form 18% of HDFC’s, this is much higher at 27-80% for the smaller home financiers.

Over the past two quarters, HDFC and peers such as LIC Housing Finance have seen incremental spreads of 150 basis points (bps) on an average versus their historical average of 100 bps, estimates Aadesh Mehta of Ambit Capital. Falling bond yields have reduced these companies’ borrowing costs and aided expansion in spreads. However, with bond yields remaining range-bound in the past month or so, these gains appear to be largely of the past. In this context, the HDFC management’s confidence of maintaining the spread at 2.2-2.3% (similar to recent trends) could be tested.

Ganapathy believes HDFC tends to increase its exposure to non-individual borrowers amid periods of rising competition, enabling it to maintain spreads in a narrow band. “We aren’t sure if HDFC could repeat this in the current environment,” he adds.

Overall, rising pressure on spreads will add to the pressure at HDFC, which has already faced moderation in loan growth and in NII in recent years. This growth has become more volatile in recent times; it grew 4%, 9% and 16% in the March, June and December 2016 quarters, respectively.

“HDFC’s loan growth has come off from 25-30% a few years earlier to 16% in the latest quarter, and could soften further. About 60% of the loan book comes from seven cities -- Mumbai, Bengaluru, National Capital Region and Chennai, among others — which are going through a severe slowdown,” says Digant Haria, analyst at Antique Stock Broking. The slowing is across the mortgage space but has reduced HDFC’s premium valuations as compared to peers, he adds.

These concerns are reflected in the scrip, flat in the past one year. Though there are no meaningful stock price catalysts from here on, the HDFC scrip is also unlikely to fall sharply. This is because of the positives from listing its life insurance business and possible return of foreign money in the markets, which should provide support to the stock price. Additionally, contribution from banks, life insurance, Gruh Finance and other businesses continue to aid its consolidated earnings.