It has been business as usual for market leader Housing Development Finance Corporation (HDFC), which continued to see healthy growth in retail loans, steady margins, and very low delinquencies in the September quarter too.

For investors concerned over the moderating growth trend within the housing finance space, alongside increased pressure on margins, HDFC’s September quarter numbers also indicate healthy prospects over the medium term. Increased traction (albeit marginally) in retail loans, slight up-tick in the high-margin non-retail segment and a modest increase in spread on loans were positives for the lender during the September quarter.

Competition in the housing finance industry has been intensifying over the past two to three years. Aside from housing finance companies and NBFCs, commercial banks too want a piece of the action, given their lacklustre growth in corporate lending and the fact that housing finance offers a low-risk, consistent growth alternative.

Size of the loan portfolio, reach of retail presence and ability to tap low-cost funds will be critical, going ahead. HDFC scores on all these parameters.

Outpaces industry

While the pace of growth for HDFC has slowed in the last two years, in line with the overall trend in the sector, it has still managed to outpace industry. In the last five years, HDFC’s retail loan book has grown at least 5 per cent above banks’ growth in this segment.

In the latest September quarter, the company’s 14 per cent growth in core net interest income was led by 17 per cent growth in retail loans (net of loans sold to HDFC Bank). Retail loans have seen good traction over the past two quarters. With loans outstanding at ₹2,75,406 crore as of September, the company is way ahead of its closest peer, LIC Housing Finance, which has a loan book of around ₹1,31,000 crore.

Also, growth in the high-margin non-retail segment, which has been impacted by the overall slowdown in the market, has been inching up in recent quarters. It grew 13 per cent year-on-year in the September quarter, up from 12 per cent in the June quarter and 9 per cent in the March quarter.

One of the key strengths of HDFC is its ability to diversify its sources of funding. With a notable portion of term loans repaid in the September quarter, the costs, as expected, have fallen. The spread has hence, moved up to 2.28 per cent in the September quarter from 2.26 per cent in the June quarter.

Term loans that constituted 14 per cent of the company’s total borrowings in the June quarter have fallen to about 11.5 per cent in the September quarter.

Besides the flexibility to switch between different funding sources, new funding sources such as external commercial borrowings (ECB) and masala bonds (rupee-denominated bonds) will help lower HDFC’s cost of funding.

HDFC also continues to sport one of the lowest cost-to-income ratios of around 7 per cent, which is a huge kicker for returns.

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