Money & Banking

HDFC: Non-core items prop up growth

M. V. S Santosh Kumar BL Research Bureau | Updated on March 12, 2018

Loan portfolio continues to be strong

A loan book growth of 20.6 per cent coupled with stable margins helped HDFC post a modest growth in core earnings. However, it was profit from sale of investments a non-core item and lower tax incidence which led to a strong profit growth of 33 per cent year-on-year for the December 2010 quarter.

Even as the current quarter net profit (Rs 890 crore) beat Bloomberg consensus estimate for the quarter (Rs 841 crore), the market was not enthused and the stock lost 3.9 per cent on Friday's close. The fall in stock could partly be attributed to expectation of monetary tightening, given the rebound in inflation. Monetary tightening impact NBFCs more than banks given the latter's cushion in the form of low-cost deposits.

Strong loan growth

Inclusive of the securitised loans, which are out of the books, HDFC's assets under management expanded 22 per cent over a year. This is higher compared with growth witnessed by the banking universe.

The individual loan segment growth stood at 24 per cent for the ended December 2010, far higher than the 12 per cent growth in the housing segment of the banking sector (as of November 19, 2010). This suggests that HDFC managed to improve its market share in housing loan segment.

However, it is noteworthy that out of the Rs 25,000 crore of net addition to the home loan portfolio of HDFC in the last two calendar years, around Rs 20,000 crore was contributed by the dual rate loans. This loan scheme was discontinued in December even as banks such as SBI continued to offer it. This makes it more challenging for HDFC to expand its loan book at the current pace.

Spreads intact

Despite rising cost of funds HDFC managed to maintain its spreads at 2.33 per cent marginally lower than the 2.34 per cent spread during the first half of 2010-11. Relatively lower base rate hike by banks may have helped even as corporate bond yields rose.HDFC prudently shifted from debenture portfolio to bank lending to raise resources over the last one year. Therefore, the bank borrowing grew 38 per cent while the overall resources grew only 20 per cent. Additionally, HDFC has increased its benchmark lending rates by 125 basis points in two phases since September. This hike will allow it to pass on rising borrowing costs to customers going forward.

The core-profit before tax growth for HDFC, at 15.5 per cent, grew at a slightly lower rate of growth compared to net interest income growth of 19 per cent due to lower dividend income this quarter.

The asset quality continues to be superior for HDFC with gross NPA of 0.85 per cent. However, sharp rise in interest rates and dual rate loans shifting to floating rates in future would be the real test to asset quality.

Added to this, the management has stated that it has already complied with the standard asset provisioning recently mandated by the National Housing Bank. This places it in a comfortable position compared with peers such as LIC Housing Finance.

Published on January 17, 2011

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