An increase in the corporate loan book was a key highlight of Housing Development Finance Corp. Ltd’s (HDFC’s) December quarter numbers. Led by construction financing and lease rental discounting, the non-individual loan book grew 10% from a year ago, inclusive of loans sold. Add that to the 23% growth in retail loans and HDFC’s overall loans grew 19%.
On the flip side, an increase in non-individual loans required an increase in standard asset provisioning. Overall loan provisions grew by one-half over a year ago. That, clubbed with lower income from sale of investments and a higher base in the same quarter last year owing to one-time income, meant HDFC’s stand-alone net profit grew by just 6.6%.
It just about met analyst estimates. Moreover, the mortgage lender’s core operating profit (before adding one-offs such as dividends and gains from sale of investments) rose about 8% from a year earlier. While that is ahead of the September quarter’s 4.3%, it is short of its loan growth at the end of the December quarter.
The company’s net interest margin was 3.85% for the nine months ended December, lower than the 3.95% for the half-year ended September. That is a reflection of not only higher leverage, but also falling interest rates affecting its returns on shareholder funds. Even as both lending and borrowing rates fell, HDFC’s spreads remained stable at 2.31%.
While asset quality has been the bugbear of its banking peers, HDFC has generally been prudent. Its gross bad loans ratio of 0.72% was little changed from three months earlier. Not only does it have sufficient provisions, it is also well capitalized to meet any growth spurt in loan demand.
Its subsidiary businesses too did well and consolidated net profit grew 11%. But with a stock that is valued at 3.6 times estimated book value for 2016-17, investors are perhaps asking whether that is enough. Since the beginning of this fiscal year, the stock is down 12.45%, just a tad better than the Sensex’s 13.3% loss.
While the company has generally been impervious to slowdowns and continued to grow its loan book, the question is whether it can grow its operating profit faster. As banks increase their focus on home loans and switch to marginal cost of funds, competition is set to increase.
The writer does not own shares in the above-mentioned companies.