The key feature of HDFC's results is that the country's largest housing financing company continued to maintain its asset quality despite the rise in interest rates.

The gross non-performing asset ratio actually moderated from 0.86 per cent in September 2010 and 0.83 per cent in June 2011 to 0.82 per cent in September 2011. Even the business growth was strong in spite of concerns of slowdown.

Yet, moderation in profit growth continued for the third quarter in a row due to further squeeze in interest spreads (difference between yield on advances and cost of funds).

HDFC's September quarter profits growth moderated slightly to 20 per cent from 21.6 per cent in the June 2011 quarter.

High cost of bank loans and the rise in bond borrowing have led to spreads compressing to 2.28 per cent for the quarter ended September 2011, from 2.3 per cent in the preceding quarter.

The delayed effect of lending rate increases also put some pressure on HDFC's spreads.

For the half year ended September 2011, net interest income growth was at 18 per cent year-on-year. Any further fall in spreads may be limited with a high proportion of floating rate loans as well as evenly matched asset-liability profile.

To contain the rise in borrowing costs, HDFC has cut its reliance on bank term loans by 22 per cent sequentially.

Term deposits were replaced by bonds, which witnessed an 18 per cent rise during the same period. HDFC's deposit rates and AAA bond yields are less than or equal to the lowest base rate in the banking system.

One key confidence building factor is that HDFC's loan book growth stayed at 20 per cent year-on-year (inclusive of off-balance-sheet lending). Interestingly, retail lending growth was strong at 19 per cent year-on-year.

It is noteworthy that HDFC improved its retail lending proportion sequentially with loan book (inclusive of off-balance-sheet) growing by 4.1 per cent over June 2011.

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