Significant slowdown in disbursements, weak real estate demand, and rise in asset quality risk have taken a toll on the housing finance sector over the past few months amid the Covid-19 pandemic. For market leader Housing Development Finance Corporation (HDFC), though its sound business model, discipline in ALM (asset liability management) and diversified funding base lend comfort, the tale has been no different. 

In the latest June quarter, HDFC’s total loan book (on AUM basis) grew by 12 per cent YoY. Growth in individual or retail loan book (excluding sale of loans to HDFC Bank) stood at 11 per cent in the June quarter, down from 14 per cent in the March quarter. Disbursements have taken a knock since the lockdown. While there has been a steady improvement in disbursements between April and June, they are still 71 per cent (in the June quarter) of the level seen in the same period last year.   

Surprisingly in the June quarter, 83 per cent of the incremental growth has come from the non-retail segment, a wide deviation from the past trend, when retail loans led the growth. The company focussing on lending to AAA rated corporates (for relatively short periods of time) in the June quarter, has driven the growth in the non-retail segment. Growth in non-retail loans was 15 per cent YoY, after many quarters of single-digit growth. The company has been cautious to lending to the developer segment over the past year. 

On the operational front, overall slowdown in loan growth and falling interest rates have impacted growth in net interest income (NII). In the June quarter, HDFC reported 10 per cent in NII down from 14 per cent in the March quarter. Net interest margins fell to 3.1 per cent in the June quarter from 3.4 per cent in the March quarter, mainly due to the negative carry on account of higher liquidity.  

Overall, earnings were impacted by muted NII growth, lower profit on sale of investments and higher provisions. HDFC reported Rs 3,052 crore of net profit in the June quarter, down from Rs 3,203 crore in the same period last year. 

Fall in moratorium loans 

HDFC has seen a notable fall in loans under moratorium. In the first phase of the moratorium, the housing finance company, saw 27 per cent of total loans come under moratorium. This has come down to 22.4 per cent in the second phase. Within the retail segment, loans under moratorium are down to 16.6 per cent down from 22.6 per cent in the first phase. 

While this is positive, the proportion of loans under moratorium is still on the higher side and will need a watch. The management has stated that of the individual (retail) loans under moratorium, about 65 per cent has never had a delay in repayment. A larger proportion of self-employed customers have opted for the moratorium as against salaried employees. Of the individual customers who have opted for the moratorium, 5 per cent faced job losses, 9 per cent faced business closures and the balance have opted for the moratorium largely to conserve cash.  Hence the management believes that asset quality risk should be under check given that delinquencies in mortgages are generally low; lower loan-to-value (LTV) also offers comfort.

On the asset quality front, HDFC had witnessed a notable uptick in bad loans to Rs 8,908 crore as of March 2020, from Rs 5,950 crore in the December quarter. The sharp rise in the retail segment was owing to disruption in collections. In the non-retail front, the increase in bad loans was due to two accounts, which were not technically NPAs but were downgraded due to the stress in the accounts.  

In the June quarter, GNPAs have fallen to Rs 8631 crore, led by fall in both retail and non-retail segment. However the full picture on asset quality will emerge only after the moratorium is lifted.  

What lies ahead? 

While the long term prospects for the residential home loan segment remains sound, near term volatility is a given. The commercial real estate sector has been affected by funding challenges and the migration of labour. In light of companies moving to ‘work from home’, the long term prospects of this segment need to be seen. 

Amid these volatile market conditions, HDFC’s superior liability base, strong capital ratios and market share gains, will hold it in good stead. The company’s ability to raise funds from diverse sources has helped it gain market share, when many other players faced liquidity crunch over the past year. In the latest June quarter too, the company has seen a strong deposit growth of 26 per cent YoY. 

HDFC’s total capital adequacy ratio stood at 17.3 per cent and Tier 1 at 16.2 per cent as of June 2020. The proposed capital raise of Rs 14,000 crore will further bolster its capital ratios and strengthen the balance sheet.