Consistent performance from HDFC
HDFC saw a marginal uptick in both individual and non-individual loan books in the June quarter on a sequential basis
Housing Development Finance Corp. Ltd (HDFC) reported a 38% increase in June quarter profit, boosted by a one-time gain of Rs.725 crore on the sale of a 22.9% stake in HDFC ERGO General Insurance Co. Ltd.
HDFC’s provisions surged sharply on an additional one-time provision of Rs.275 crore towards standard assets and other contingencies. These are one-time costs and too much should not be read into them. Even so, if we do not take profit on sale of investments into account and even after adjustments are made for the extra provisions that have been made out of the sale of investments, the increase in profit before tax comes to around 6.4%, compared with a year ago. That is no great shakes, but it’s worth noting that the March quarter also saw a stake sale and a rise in provisions. After adjusting for such items, profit before tax growth was even lower, year-on-year, in the March quarter.
HDFC’s loan book grew by 18% in the June quarter; however, income from operations rose 10%. According to the management, this lag is because of the company’s focus on the retail business, which has lower margins, and not because the company’s margins or spreads are under pressure. Indeed, spread on loans over cost of borrowings for the June-ended quarter stood at 2.26%, compared with 2.29% in the previous quarter.
On a year-on-year basis, net interest margin was stable at 3.8%, although sequentially it slipped 10 basis points. A reason for the decline could be competitive pressures. One basis point is one-hundredth of a percentage point. HDFC saw a marginal uptick in both individual and non-individual loan books in the June quarter on a sequential basis. The disbursements of individual loans grew 26% in the quarter, higher than 18% in the March quarter.
Asset quality saw marginal weakness as gross non-performing loans came in at 0.75% of the loan book, 5 basis points higher sequentially. But this is not seen as a cause for concern.
The country’s largest mortgage lender has been a steady performer. Shares of HDFC hit a new 52-week high on Wednesday, even before the June quarter earnings were announced, which shows how the market has rewarded the stock for its consistency.
The stock trades at a substantial premium to peers such as LIC Housing Finance Ltd and Dewan Housing Finance Ltd, given the stability in earnings. However, in the past one year, it has slightly underperformed the Sensex.