Can the largest mortgage lender be immune to the pain of the industry it lends to?

A look at Housing Development Finance Corp. Ltd (HDFC) shows that the answer is a yes and a no.

HDFC trumped analysts’ expectations on profit by reporting a 39% growth in profit after tax. Its growth metrics were also impressive with its balance sheet growing 18%. Considering the size of its balance sheet, this is indeed cheering.

As always, the driver of growth has been individual loans that grew 18% on an assets under management basis. Disbursals jumped 29% for FY18. If we view this alongside the ongoing narrative of the real estate industry, HDFC comes across like a shining beacon.

So where is the pain?

HDFC’s corporate loan book shrank from a year ago and the overall non-individual book grew by 17% and that too largely because of growth in construction finance. This is lower than the average 20%- and-above growth in the last three quarters.

The non-individual book is the margin-friendly part of HDFC’s balance sheet as individual loans tend to be given at lower rates. A slowing corporate loan book doesn’t augur well for the future of spreads for the lender.

So, how was HDFC able to maintain its spread at 2.29%, have a balance sheet growth of 18% and exceed profit expectations?

The mortgage king undoubtedly benefited from the government’s thrust on affordable housing. The HDFC management explained that growth in affordable housing loans was robust, mainly coming from the economically backward and low- income groups. The two categories showed a growth of 32% and 41%, respectively.

HDFC seems to have cracked the code on asset quality. Unlike the concerns expressed on loans to government subsidized low-income groups, the mortgage lender has managed to keep its bad loans below 1% of its individual book.

Recall that the Reserve Bank of India had warned that delinquencies are higher in the small-sized loans given to low-income and economically backward segments. “Asset quality is not different in affordable housing. The way we approach a loan does not change," said Keki Mistry, vice chairman and chief executive of HDFC.

Perhaps this is why the stock gained 1.5% on Monday, even though it trades at nearly five times its estimated book value for FY19.

While HDFC was not immune to the pain in real estate, the lender simply used the government’s push to offset this. The management hasn’t given a guidance for future quarters. But HDFC’s track record gives enough comfort for investors.

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