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Housing Development Finance Corporation Ltd’s (HDFC) September quarter (Q2) earnings showed all the signs of a swift recovery after a nasty, locked quarter due to the covid pandemic.

More and more borrowers are beginning to get back to regular repayment schedules, which augurs well for HDFC’s asset quality. Indeed, collection efficiencies are up to 96.2% in Q2 from 92% in Q1. In other words, HDFC was able to get back money from more than 95% of its customers during Q2.

Increased discipline of repayment among borrowers meant that provisioning needs will now be lower. Proactive lump-sum provisioning towards pandemic risks in Q1 also saved HDFC from setting aside too much money in Q2. Ergo, provisions dropped to less than a third of Q1 to 436 crore. That does not mean the mortgage lender is sitting on less insurance against risks. HDFC has 1,200 crore specifically towards covid-19 and rising collections efficiencies indicate that it would suffice.

Strong rebound
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Strong rebound

The lender seems to have seen stronger recovery from the pandemic’s blow than it had anticipated before. Indeed, back in July, chief executive Keki Mistry said collection efficiencies may reach pre-covid levels by January 2021. However, collections have already improved vastly by September. It also means that HDFC would be able to keep its historic gross bad loan ratios intact.

For Q2, the lender’s gross bad loans were 1.81% of total loans, taking into account the standstill on bad loan recognition given by the Supreme Court due to an ongoing petition. What’s more is that Mistry does not expect restructuring requests from customers to be significant.

But HDFC’s pristine asset quality is taken for granted by investors. Notwithstanding a crisis, HDFC is known for its strict underwriting standards. True, the non-individual loan book has given it some moments of discomfort in the past and is doing so now as well.

What buttresses HDFC’s valuations besides asset quality is a steady loan growth. For Q2, the lender reported a growth of 10% in the individual loan book. That is still slightly lower than the 14-15% y-o-y the lender used to clock in good years. Even so, the outlook seems upbeat. Disbursements for the quarter were 95% of the previous year.

“Disbursements of loans in October were the second highest seen by us," said Mistry in a virtual media conference. Another comfort is that all incremental lending during the quarter has been in the low-risk individual loan book. In the previous quarter, the lender had relied on non-individual loan disbursements for growth.

Investors have taken note of the sanguine outlook, enough provisions and a big beat on net profit for Q2. HDFC’s shares rose over 6% on Monday in response to the results.

All the lender now needs is to sustain the momentum it has gained for valuations to stick around.

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