HDFC: the king of mortgages is missing its royal edge
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Housing Development Finance Corp. (HDFC) Ltd’s fourth quarter results showed some lingering effects of demonetisation on its operating performance. Its net interest income grew at a slower pace of 13% to Rs3,122.61 crore compared with impressive 17% growth in the December quarter.
The mortgage lender’s loan book growth has indeed slowed in the last two quarters, which are visible effects of the cash purge.
However, since competition in the housing finance market has intensified with every bank going tooth and nail to garner market share, the impact of this is also likely to be there.
The growth in home loans is the sole engine behind bank credit growth in FY17 and HDFC felt the pinch. For the quarter ended March, HDFC reported 14% growth in its individual loan book, the bedrock of its operations. This is adjusting for the loans sold by the lender. This is a shade lower than the December quarter’s 15% growth. Indeed, the lender has seen better quarters previously with growth averaging around 16%.
To be fair, the fact that demonetisation didn’t hit the loan book expansion significantly should be noted.
HDFC’s individual loan book has been growing slower than its disbursals to developers all through 2016-17 and this trend is unlikely to change immediately. A slowing individual loan book growth should unsettle, but the fact that incremental loan additions comprise largely of individual loans (about 70% in 2016-17 on an asset under management basis), there is little reason to doubt the lender’s strength.
Moreover, developer loans are margin-friendly and so the lender’s spreads have benefited. Adding the advantage of a drop in bond yields and bank lending rates, HDFC has been able to increase its spread to 2.33% in FY17 from 2.29%.
Indeed, not only has the largest home loan lender managed to keep its growth momentum intact but has also bettered in asset quality.
Asset quality improved sequentially with gross non-performing loans slipping marginally to 0.79% of loan book from 0.81% in the previous quarter. However, from a year ago period it is 9 basis points higher.
All of that is good news but the unsettling fact is the slower loan book growth in the last couple of quarters of 2016-17. Whether it was due to the cash purge or competition is something to watch out for. With demonetisation behind, the performance in the current fiscal will hinge more on the mortgage market growth and HDFC’s performance in the face of intensifying competition.
The over 10% rise in the mortgage lender’s stock since it released its third quarter results on 30 January looks justified and it trades at a price to book of 6.3 times its FY17 book value (standalone financials). But for valuations to continue to look reasonable to investors, HDFC will need to show that it can triumph over competition in the coming quarters like it has done in the past.