At first blush, Housing Development Finance Corp. Ltd’s (HDFC) June quarter numbers indicate that India’s oldest mortgage finance company has done well. Net profit is up 21.6% from a year ago, although it is marginally lower than what the Street had expected.
Even if one adjusts for the Rs 16 crore from the sale of investments, profit after tax growth comes at a robust 19%. Net interest income grew at a similar rate.
HDFC’s spread on loans over the cost of borrowings was 2.3%, about 3 basis points less than what it had reported in the preceding quarter. The company was able to pass on higher rates to customers. One basis point is one-hundredth of a percentage point.
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Asset quality, however, doesn’t seem to be a major problem so far. Non-performing loans at the end of June stood at 0.55% of its loan book, about 9 basis points more than what they were at the end of March.
But the key question for investors is how long will it be before higher lending rates start hurting demand.
Sure, HDFC has reported a 22% increase in loan approvals in the June quarter from a year ago. Disbursements improved by one-fifth. Retail loans grew at 21.5%, while corporate loans grew by one-fourth. That is higher than the 17.4% growth in the real estate lending from the banking sector till the week ended 20 May, Reserve Bank of India data show.
But with most pundits expecting another 50 basis points rate hike by the central bank, higher rates could well crimp demand in the coming quarters. The signs of these are already evident.
With lending rates pinching and real estate firms unwilling to cut prices despite poor volumes, Indians are deferring buying homes. For instance, retail loan growth in the March quarter was 27%. In the December quarter, HDFC’s loans to individuals grew faster at 31%. In the preceding three months, individual loans grew at 49%. Retail loans account for two-thirds of its loan book.
Also, consider the trend in loan approvals, which is, after all, a leading indicator of loan growth in the future. Loan approvals grew by 29% each in the September and December 2010 quarters, dropped to 24% in the March 2011 quarter and went down further to 22% in the June 2011 quarter.
The stock has marginally outperformed the Bankex on the Bombay Stock Exchange since the beginning of this year.
But with the sector as a whole in for difficult times because of a slowing economy and rising rates, HDFC may well continue to track the broader index for some more time.
Graphic by Sandeep Bhatnagar/Mint