The company reported a 27% jump in net profit for the March quarter, beating the Street’s estimates. It also reported enviable asset quality metrics as its bad loan ratios improved from a year before. Bad loans formed just 2.2% of its total loan book and the company continued to make provisions far higher than required by the regulator.
This was thanks to HDFC’s sensible move to focus on retail borrowers, even though margins are low here, compared with giving loans to developers and their allies.
Ergo, the over 1% gain in the stock in a weak market was due to the fact that there no unpleasant surprises from the mortgage lender. After all, its peers have reported troublesome asset quality and a deceleration in growth due to the slowdown in the real estate sector. The pain from developer financing is widespread among housing finance companies.
Over the last one year, the slowdown in real estate has deepened even as a liquidity crunch at financing companies has hurt real estate developers.
In this backdrop, HDFC has managed to maintain its 15% loan growth through its focus on its strengths which are retail borrowers. Since lending to developers has become fraught with risks, the lender has embraced lending to affordable housing in a big way on the retail side. During the year, 18% of HDFC’s total loan approvals were to customers from the economically weaker section and low income groups.
But the malaise in real estate is too deep and the liquidity problem too wide for even HDFC to completely escape it. Hence, the mortgage lender has seen its loan growth decelerate to a multi-quarter as its developer loan book shrank. In FY19, HDFC gave 85% of disbursals to retail customers and the rest to construction and lease rental firms. Developers didn’t get anything from it. To be sure, the slowdown is also due to a jump in sale of loans to HDFC Bank. “We believe that the gap in growth rates of AUMs and loans will narrow from mid-FY20 onwards as base of sell-downs normalise," said analysts at CLSA India Pvt. Ltd.
As the adjoining chart shows, the mortgage lender has seen a sharp drop its loan growth rate. That said, HDFC has managed to maintain its spreads, and margins improved slightly in the March quarter.
The company’s asset quality and reasonable loan growth buttress its valuations and the performances of its subsidiaries too add weight. The stock trades at a multiple of nearly four times its estimated book value for FY20.