HDFC: wholesale loan-book picks up

Housing Development Finance Corp. Ltd (HDFC) has shown its ability to ride out a sluggish economic environment. So, its loan book growth of 23% (inclusive of loans sold) at the end of the September quarter was not a big surprise. It was the same rate as the June quarter. The only difference was the pick-up in the corporate loan book, which the firm’s vice-chairman and chief executive Keki Mistry attributed to improving business sentiment.

Loan spreads were stable at 2.29% and so too was asset quality. Gross non-performing loans as a proportion of the loan book stood at 0.69% at the end of September. One investor concern was bad loans in its non-individual segment; there, too, the bad loan ratio has stood at close to 1% in the past three quarters.

Where the firm has done well is in managing its business operations. Operating profit before tax, dividends and sale of investments rose 21% from a year ago in the September quarter. This is much higher than the on-balance sheet loan growth of 15%. In the three months ended June, operating profit grew 16.6% compared with loan growth of 15% (net of sold loans). A slightly higher operating profit growth from its core business compared with on-balance sheet loan growth is a steady state situation for the firm.

Thus, despite a 40% decline in dividend income—unsurprising since unlike in the previous fiscal year, dividends were lumped in the June quarter—HDFC’s adjusted net profit growth was 20%. The adjustment is for a ₹ 83 crore provision for taxes owing to a new rule that wasn’t there a year ago.

HDFC is now trading at a relatively expensive valuation of 5.25 times its estimated book value for fiscal year 2015, which probably explains why it slightly lags the Sensex since April. With an economic recovery in the works, the corporate loan book should pick up further, which should help margins and fees. However, it might be a couple of quarters before the improvement in sentiment fully translates to loan book growth.