Stock Fundamentals

HDFC on a strong footing

Radhika Merwin | Updated on November 09, 2019

Good asset-liability position makes the firm stand out in a stressed environment

Over the past year, the liquidity crisis in the NBFC space, more so in the housing finance sector, has brought to light structural issues in the asset-liability management (ALM) of most players. Housing Development Finance Corporation (HDFC), the market leader in the home finance segment, has been able to tide over the tough times, thanks to its sound business model and steadfast discipline in ALM. The company’s ability to raise funds from diverse sources — at reasonable rates — has helped it gain market share when many other players facing liquidity crunch have lost ground.

While loan growth for HDFC has moderated over the past year — given the challenges in the real estate sector, in particular the developer segment — the performance has been nonetheless healthy. In the latest September quarter, HDFC reported a growth of 11.7 per cent in its overall loan book (excluding sale of loans to HDFC Bank), driven by a 15 per cent uptick in the retail/individual loan segment. Growth in the non-individual segment, however, remained modest at about 3 per cent as the company continued to consciously curtail some of its lending to the segment, given the uncertainty and risks in the space.

While the company’s delinquency in the individual segment has been stable, the non-individual segment continued to report stress in the September quarter, with the GNPA ratio inching up. An improvement in the non-individual segment will be key for a significant improvement in loan growth and profitability.

That said, given the unfavourable credit-risk environment, HDFC would continue to find favour with investors seeking stability and visibility in earnings. In the latest September quarter HDFC reported profit before tax of ₹4,530 crore, a growth of 30 per cent y-o-y. This includes the profit on sale of investments on part stake sale of Gruh Finance of ₹1,627 crore. Excluding this, growth in profit before tax stood at about 12 per cent.

Sound core business aside, HDFC also holds stake in HDFC Bank, HDFC Standard Life, HDFC AMC, HDFC Ergo and Bandhan Bank (post merger of Gruh Finance with Bandhan). These businesses add value to the intrinsic underlying value of HDFC’s core mortgage business.

Investors with a two- to three-year time horizon can buy the stock at current levels. It is trading at about 4.2 times the one-year forward book value (consolidated), which is more or less in line with past trends.


Steady retail growth

Over the past year, growing challenges in the real-estate sector have impacted growth for housing finance companies. The liquidity crisis post IL&FS and DHFL episodes made matters worse for many.

For HDFC though, its diversified funding base, good ALM position and market leadership helped in its performance. While the overall loan growth (excluding sale of loans) did moderate — from 19 per cent in the June 2018 quarter to 11.7 per cent in the latest September 2019 quarter — it was mainly due to the slack in the non-individual segment. From 18 per cent in June last year, loan growth in the non-individual segment has fallen sharply to 3-odd per cent in the September quarter. While this is a concern, given the persisting uncertainty in the developer segment, HDFC’s calibrated growth in the segment is prudent.

The retail loan growth for HDFC has in any case been steady, which is a positive. HDFC’s focus on the affordable housing segment that has been in focus has also aided growth.




During the half-year ended September 2019, 36 per cent of home loans approved in volume terms and 18 per cent in value terms have been to customers from the economically weaker section (EWS) and low-income groups (LIG). Monthly approvals in EWS and LIG segments inched up to about 9,300 loans (₹1,500 crore in value terms), from about 8,700 loans as disclosed in the previous June quarter. The average ticket size was steady at ₹10 lakh and ₹17.5 lakh for the EWS and LIG segments respectively.

Net interest margins (NIM) and spread remained steady for HDFC in the latest September quarter at 3.3 per cent and 2.26 per cent, respectively, as against the previous June quarter.

However, spreads have slightly fallen in the first half of the current fiscal, vis-à-vis March 2019 levels, owing to a rise in cost of borrowings.

While the cost of funds may have stabilised for now, there could be pressure on NIM, going ahead, owing to intensifying pricing competition from banks moving to external benchmarks (repo rate) to price their loans. Over the medium term, NIM can improve if growth in the developer segment picks up, which looks challenging currently.

On the asset quality front, HDFC has seen a slight uptick in GNPA ratio — from 1.29 per cent in the June quarter to 1.33 per cent in the September quarter. The stress has been from the non-individual loan book, where the GNPA ratio has inched up (from 2.68 per cent to 2.87 per cent). It will be important to see how the asset quality in the non-individual loan book pans out in the coming quarters. HDFC’s healthy provisioning though is a key positive.

Published on November 09, 2019

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