HDFC’s gilt-edged loan book dims as bad loans tick up
Mortgage king Housing Development Finance Corp. Ltd (HDFC) rarely disappoints its investors and the June quarter results weren’t off the script. Optically, the 16% year-on-year fall in net profit to Rs1,556 crore was higher than what the Street expected.
The company’s stake sale in its subsidiary HDFC Ergo last year attracted a higher effective tax rate and a one-off extraordinary charge of Rs275 crore to the profit and loss account—the reasons behind the steep fall in profits.
Beyond the profit, the metrics were encouraging. HDFC’s loan book grew at a faster pace of 18%, giving a glimpse of the mortgage lender’s impressive historical average growth rate. The fact that its loan growth has bounced back after being hit by demonetization for two quarters should give enough reasons for investors to shrug off the net profit disappointment.
The strong loan growth backed the 16% net interest income growth. Add an improvement in the spread that the company earns from lending to 2.29% from 2.26% a year ago and the stock’s 3% rise in the last three months seems justified.
However, one needs to look at how the loan growth and the spreads have improved for the lender. HDFC’s strength is its individual loan book, the quality of which is stellar as non-performing loans have always been less than 1% of the total loan portfolio. For the June quarter, individual loan book expanded by 16%, while the non-individual loans or loans to developers grew by 22%. The growth in developer loans has been faster than that of individual loans for many quarters now.
Incrementally too, the share of developer loans has been rising. Essentially, the company has been comfortable lending more and more to developers although loans to homebuyers still dominate at more than 70% of the book.
HDFC has been consciously increasing the share of developer loans in its loan book simply because spreads on individual loans are lower. For it to maintain net interest margins, a gradual shift to developer loans is the answer.
The flipside to this is that lending to developers is inherently riskier than lending to individuals. This risk is getting more visible every quarter as the mortgage lender’s bad loan ratios are inching up. The gross non-performing asset (NPA) ratio as of 30 June was 1.12%, up from 0.75% a year ago and 0.79% at the end of the previous quarter.
The rise in gross NPA ratio was also due to the fact that HDFC had a lumpy exposure to one of the dozen bad loan accounts the Reserve Bank of India had asked banks to refer to the National Company Law Tribunal under the Insolvency and Bankruptcy Code.
For now, HDFC seems to be comfortable with the increasing risk on its loan book through developer loans. With the stock trading at nearly four times the estimated price-to-adjusted-book value for fiscal year 2018, investors too don’t seem perturbed.