HDFC: loans cheer but operating profits don’t
While loan growth has motored along at a decent pace, HDFC's stand-alone operating profit growth has decelerated in recent times
Housing Development Finance Corp. Ltd (HDFC) continues to ride the growth in mortgages but operating profits are not matching step. At the end of March, its retail loan book grew 24% from a year ago (after adding back loans sold), while the wholesale book, too, showed some signs of traction with 9% growth.
While loan growth has motored along at a decent pace, HDFC’s stand-alone operating profit growth has decelerated in recent times. In the March quarter, too, operating profit grew just 6% from a year ago, much slower than the overall loan book growth of 19%. Of course, slower growth in net interest income also had a lot to do with this. Net interest income grew 8% from a year ago.
The decline in net interest income was perhaps a fallout of a slight dip in the net interest margin. HDFC doesn’t give out quarterly numbers, but for the whole fiscal 2016, the margin was 3.9% versus 4% for the year ago. On the other hand, HDFC continued to maintain its spreads, which saw a marginal 3 basis points dip in the just ended fiscal year. One basis point is 0.01 percentage point. The other reason for a deceleration in operating profit growth is the higher share of non-retail loans.
Provisions grew nearly 40% from a year ago to ₹ 95 crore. This is apart from the ₹ 450 crore one-time exceptional provision the company has created.
The company’s management, however, indicated that this shouldn’t be seen as a sign of impending stress in advances. “Whenever we get lumpy profits, we try to create a contingency reserve," said Keki Mistry, vice-chairman and chief executive of HDFC.
During the quarter, the mortgage lender sold shares in its life insurance unit for ₹ 1,513.41 crore. With this latest addition, HDFC’s overall excess reserves stand at ₹ 736 crore, much ahead of what is required for a firm whose gross bad loan ratio is just 0.7%.
This one-off gain was the reason for HDFC’s 40% increase in stand-alone net profit. Shorn of these one-off gains and provisions, net profit growth would have been more or less in line with its operating profit growth.
The question for investors is this: is 6% operating growth enough for a firm whose core lending business trades at 3.3 times its adjusted book value for fiscal 2017? That HDFC shares have yielded about the same as the Sensex in the past 12 months answers that question partly. Investors would also do well to monitor spreads in the next few quarters as banks switch to the new marginal cost of funds-based lending rates (MCLR). On Monday, State Bank of India announced a cut of 5 basis points in its home loan rates based on its revised MCLR.
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