Home loan pioneer finds a new home: HDFC journey will complete on July 1

Housing Finance Development Corporation Ltd, commonly known as HDFC, which pioneered retail home loans in the country almost half a century ago, decided to move to a new home at the beginning of last financial year.

HDFC announced its decision to merge with HDFC Bank, in which the former had 19 per cent as promoter. HDFC Investments, which too is classified as promoter group, has another 6.59 per cent.

The decision to merge with the largest private sector bank had been in the works for some years. As regulatory arbitrage narrowed over the years between banks and non-banking finance companies, HDFC realised it was time for the reverse merger, which had support from the regulator too.

Established on October 17, 1977, the first home loan was disbursed in 1978 to D B Remedios in Bombay, now Mumbai. That was also the year the company decided to go public with an issue of equity shares of Rs 10 crore.

The journey will complete on July 1, 2023, the date on which the merger with HDFC Bank comes into effect.

There are several milestones achieved between these two dates.

In these years, HDFC ventured into various businesses -- from insurance to mutual funds to education loans. In 1994, HDFC received in-principle approval to set up a private commercial bank. HDFC Bank went on to become, over the next two decades, not just the largest private-sector bank but also the largest credit card issuer, by a margin.  The home loan provider financed over 9.3 million housing units, till the end of FY22.

On Friday, ahead of the merger with HDFC, HDFC Bank ranks as the most valuable bank in India with a market cap of Rs. 9.52 trillion (India’s third-most valuable company), above ICICI Bank’s Rs. 6.54 trillion and State Bank of India’s Rs. 5.11 trillion.

One of the key reasons for the success of HDFC is an efficient and low-cost operating model. The home-loan market has become intensely competitive in the last decade or so, with more and more banks offering such products. HDFC was extremely sensitive to competition and it reacted almost on a real-time basis on loan pricing.

Despite competition, the corporation never sacrificed on the spreads, which hovered around 2 per cent for many years now.

HDFC also maintained its asset quality throughout the cycles, particularly in the last decade, when many banks saw their non-performing assets surging.

Both HDFC and HDFC Bank have received investors’ appreciation for the merger. The asset base of the merged entity is Rs 31.92 trillion, as of March 31, 2023.

The Indian home loan market estimated slightly over $300 billion – reflecting a mortgage to GDP ratio of just 11%. With the country expects to double the figure to $600 billion in the next few years – this presents the opportunity for HDFC Bank, that HDFC brings to the table.

The HDFC stock has risen by 15 per cent since the merger was announced, while HDFC Bank’s shares are up 13 per cent, as compared to the broader market, where the increase is in high single digits (the Sensex up 9.2 per cent and the Nifty 8.6 per cent).

HDFC shareholder earnings ROSE 20% CAGR in 30 years

Along with being a pioneer in financing the middle class dream of owning a home, HDFC also rewarded its shareholders handsomely. The scrip that traded at Rs 13.7 apiece (price adjusted for bonuses, splits, etc) on June 30, 1993, grew multifold to close at Rs 2,821.50 on June 30, 2023, the last trading day of month. This translates into a compound annual return of 19.45 per cent in the past 30 years. 

The rewards come on the back of its strong financial perfo­rmance, wherein from FY2002 to FY23, its consolidated total income has grown from Rs 2,889 crore to Rs 1.64 trillion, and conso­lidated net profit has risen from Rs 627 crore to Rs 26,161 crore. Its net worth, a barometer of financial standing, grew robustly from Rs 2,870 crore in FY02 to Rs 2.01 trillion at the end of March 2023 and dividend payout grew from Rs 304 crore for FY02 to Rs 8,146 crore for FY23.
 

Abhijit Lele