Mumbai: Keki M. Mistry, managing director of Housing Development Finance Corp. Ltd (HDFC), India’s oldest mortgage firm, believes that both home loan rates as well as property prices have peaked. With the surfeit of liquidity in the banking system, and inflation under control, Mistry feels there is scope for interest rates to go down. HDFC will take a call on lowering its home loan rates next. In an exclusive interview with Mint (on Wednesday), Mistry explained why HDFC is a valued company on the bourses, its corporate strategy and why the Indian mortgage market is safe and will remain unaffected by the ripples of the subprime lending debacle that is fast spreading across the globe. Edited excerpts:
Congratulations. The HDFC stock is trading at its lifetime high (on Wednesday, HDFC stock closed at Rs2,065.95. It closed at Rs2,015.50, losing 2.44%, on Thursday).
It’s a reflection of our performance. The business has been good. Loan disbursements grew by 29% in the April-June quarter while pre-tax profit grew by 32% and post-tax profit by 26%. Our cost-to-income ratio is one of the lowest in the world. The worry that the market had apprehending pressure on spreads and business slowdown is behind us.
A lot of people talk about our share price being expensive. They normally look at the book value of our share that does not reflect the value of our investment in various companies. The unrealized profit from our investment in listed entities was around Rs9,000 crore, net of tax, in June and now it is approaching Rs10,000 crore. If we were to do a US GAAP accounting, then these would get added to our net worth. If we were to compute the book value of our share after that, it would be around Rs670 per share. So, the price-to-book multiple will come down to around three times. And this does not capture the value of unlisted investments. There is huge value in life insurance, the non-life company and the asset management business. If this is computed at an appropriate price, then the price-to-book multiple will be around two times.
HDFC managing director Keki Mistry
The regulator is worried about the growth in home loans.
Not so much today as it had about a year ago. It was probably necessary at that time because some banks did risky lending by going to the extent of giving loans up to 100% or 110 % of the value of the property. When you are lending up to 110%, then you’re in trouble if the property prices fall. So there were concerns and they have been addressed now. Sanity is back in the system. You would have seen a slowdown in the amount of home loans given by banks last year and in the first quarter of this year.
What about your own book?
We have always told our investors that we pursue four objectives. We have never been in the market share game; the focus is on asset quality. In the last 30 years of our business, we disbursed over Rs1.2 trillion home loans and have a cumulative loan losses of Rs48 crore. Our second objective is to increase our return on equity. In 2007, it was 31.3%. The third thing that we look for is growth that we can manage. Every year we target growth of 25%, and in the last 10 years we have been growing at this rate. And our fourth objective is to improve our operational efficiency, which we calculate as the ratio between cost and income. That ratio was 12% for last year, which makes us one of the lowest ratios in the financial system anywhere in the world. We have never chased risky loans just for the sake of market share.
What’s your market share?
It would be 35-40% today. In the first quarter of this year, we have gained some market share as some of the banks were slower. What banks show as housing loans in books are not necessarily housing loans. As part of priority sector lending, banks give money to housing finance companies and these loans would in all probability be considered as housing loans. If you strip off all that, we would be No. 1.
What is the level of your non-performing loans (NPLs)?
NPLs would be 0.9% if we follow the norm that requires us to classify a loan as NPL if the borrower has not paid for 90 days and 0.7% if a borrower has not paid for 180 days.
So, there is no strain in this sector at all?
In asset quality we see no strain at all. In fact, in the last three or four years, our NPL numbers have kept improving.
Do you see any impact of the US subprime crisis?
No, I don’t see any impact whatsoever. There is no sub-prime lending in India in any substantive way. The situation in the US is completely different. Our average loan to value of property ratio is only 67%, so the individuals put in 37% money of their own. In the US, people take debt that covers 85-90% of the value of the property. In India, people are still debt averse and most of them don’t take loans more than what they can pay off.
So, you don’t see a bubble in the sector?
I don’t think there is a bubble. No doubt, one or two banks have done some rash lending. But there is no bubble.
What’s your outlook on interest rates and property prices?
We think property prices have peaked. Whether they will come down 5%, 10% or remain flat is very difficult to say. But we don’t see too much appreciation in property prices from these levels. There could be pockets where prices had not grown and we may see some increase there. For instance, Nashik has not seen any significant property price rise for a couple of years. But by and large, property price rise has a lot to do with affordability. Why have property prices gone up? This is because people are willing to pay more. And why are people willing to pay a higher price? There is more prosperity.
We think the rates have peaked. Interest rates went up sharply because of inflation fears. That is why the Reserve Bank of India has raised banks’ cash reserve ratio (CRR). Inflation is under check now and there is scope for interest rates to come down. We could have looked at bringing down interest rates by this time but for the CRR going up. We will take a call on interest rates after seeing how things settle down over the next seven to eight days.
To what extent do you plan to cut rates?
I can’t say that. We have to watch the market. After the new norms for external commercial borrowing came in, interest rates have gone up 10-15 basis points. I am not firmly saying that we will reduce rates but we will meet to take a re-look (at rates).
Why are you delaying the merger (of HDFC) with the bank (HDFC Bank)?
First of all, I don’t think it is inevitable. It makes a lot of sense in the long term but its economics has to make sense. Today, the economics doesn’t make sense. Because of the cash reserve and investment in government bonds that a bank is required to do.
We have a Rs70,000 crore balance sheet and if we merge with the bank today, we have to buy government securities worth 25% of our assets and to put in 7% of our liabilities in the form of cash reserve with RBI, earning nothing. This is the reason for not merging with the bank.
So, you will merge with the bank, but not now, right?
As a matter of policy, it can be two years, three years or even five years later—whenever the regulatory environment is right. We are not saying that the merger will happen for this very reason. It is a combination of several factors.
Citibank now holds 12% in HDFC. When will it take over HDFC Bank?
This is rubbish. I don’t think the idea of Citibank getting into HDFC is to take over the bank. Like any foreign investor, Citi sees that there is upside in HDFC.
There is some synergy. We could work together, at some stage. They have offices all over the globe; they could source mortgage loans for us from non-resident Indians.
Are you working on a formal arrangement of this sort?
Yes, we are working on it. Basically it is to help each other’s products. But in a manner that doesn’t impact HDFC Bank. Nothing has been finalized yet.
Who will be the new partner at your non-life business now that Chubb is out?
We are talking to two or three firms. Within this month we will take a final call and choose our partner.
How has the life insurance business been doing?
It has been growing very well. Since 2003, the premium income has been growing by over 100%. It now accounts for about 8-9% of the private sector business.
When do you plan to take the business public?
There is no concrete plan—maybe in two or three years. We want the company to grow. The main purpose of getting Carlyle as an investor in HDFC was not to raise money for the mortgage business but to get capital for investing in the subsidiaries.
Do you have any plans to list your asset management company?
It is doing very well. Funds under management are around Rs35,000 crore. And we are profitable. Today we have no plan to list life and non-life companies as well as the AMC.
HDFC has not entered the market for long. We don’t need any fresh capital. We last raised equity in 1995 and that time told investors that we will raise return on equity by 1% every year. In 1995, our return on equity was 15.5%. It rose to 31.3% in 2007.
But you raised money through preferential allotments...
We have raised $750 million between Carlyle and Citibank. Of this, about $350 million is going to the bank and $360 million to life insurance. Nothing is being used for the mortgage business.