HDFC: as rates increase, maintain high margins will be key
The 33% net profit growth of India’s biggest mortgage lender, HDFC, may have exceeded the estimates of various brokerages and the ET Intelligence Group. But shorn of the profit from sale of its investments in IL&FS, a one-off transaction, profits would have grown at a far more modest 21%.
Investors, however, could have a few concerns relating to the rising cost of funds as interest rate tightens, which, in turn, could squeeze margins, the quality of assets and the ability of the company to sustain its high growth in disbursements after the withdrawal of the teaser loan scheme.
HDFC’s interest costs have been climbing. On a sequential basis, its cost of borrowing has gone up 60-70 basis points, says ASV Krishnan, an analyst at Ambit Capital . But, even after factoring this in, the company’s spreads on loans at 2.33% have not been impacted much. This is because close to 70% of the loans are based on floating rates. Therefore, any rise in costs is passed on to the borrowers. The pressure on costs could be just in the near term.
What HDFC has managed well is to grow its loan book without compromising much on asset quality. But, unlike in the past, a third of its loans have been given to builders, developers and corporates. Deterioration in asset quality in this segment could be a concern, even though the lender has managed to keep in check its gross bad loans at 1% for the last eight quarters, despite the fluctuating fortunes of the realty sector. What also provides comfort is the higher provisioning of 1,093 crore, in line with the new regulatory norms, by transferring 272 crore from its reserves.
HDFC recently stopped its teaser loan or what is known as dual-rate loans, which aggregated 20,000 crore of the total retail loans of 81,781 crore. The mortgage lender has seen a lot of growth because of its pricing, but now it could well be a test for HDFC in the next few quarters since the teaser rates have been withdrawn. But the management has said that demand, especially in the non-metros, is still good. HDFC home loan demand is likely to be sustained since its average ticket size is 18 lakh.
Given the spectre of higher interest rates, the challenge for the mortgage lender would lie in maintaining high margins and disbursement without affecting asset quality.
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