HDFC: Rise in individual loans with focus on affordable housing is key

HDFC Bank branch office in Mumbai
Housing Development Finance Corporation (HDFC) posted a better than expected performance for the March quarter, with standalone net profit surging 39.2 per cent year-on-year (y-o-y). Even if the contribution from a one-time gain of Rs 63 million is removed, it was ahead of estimates. A 12.6 per cent y-o-y growth rate in net interest income (NII) (13.6 per cent growth for 2017-18) beat expectations of 14 per cent growth, supported by healthy increase in loan book.

The full year’s profit, which surged 63 per cent, was boosted by a one-time income of Rs 52.6 billion by selling stake in subsidiaries and an initial public offering of equity of its life insurance arm. Nonetheless, the core business did well with net profit rising 13 per cent in 2017-18. Net interest margin (NIM) at 4 per cent was also stable at the year-ago level. 

The on-balance-sheet loan book increased by 21.2 per cent as of March 31, led by 23 per cent rise in individual loans, pushing up share of this segment to 70 per cent in 2017-18 from 69 per cent a year ago. Increased focus on affordable housing, comprising an economically weaker section (EWS) and low-income group (LIG) supported the growth.

Loans to EWS and LIG increased faster by 32 per cent and 41 per cent, respectively, in 2017-18, owing to a lower base. Around 19 per cent of incremental loans, in value terms, came from these sections.  Going ahead, policy makers’ thrust for the housing sector should auger well. 

“Structural demand for housing will remain strong due to an extremely low penetration level of mortgages. Also, government initiatives such as a subsidy scheme for first-time home buyers will push housing growth,” said Keki Mistry, vice-chairman and chief executive officer of HDFC.

Apart from the individual segment, the management is hopeful of an upswing in corporate loans.

HDFC's asset quality indicators were comfortable,  with non-performing loans at 1.1 per cent of advances as of March, an improvement from 1.2 per cent as of December 31. According to analysts, HDFC is also improving its risk matrix by keeping aside one-time income for future unforeseeable events, a practice seen in the past, too.

Standalone business apart, strong visibility for its subsidiaries has also made analysts positive. 

The performance of subsidiaries can be gauged from a 28 per cent rise in HDFC’s consolidated profit (excluding one-time gains) in 2017-18.

“Steady growth in parent business, with healthy margins and earning visibility, makes HDFC a good long-term buy. We have a positive outlook on India’s housing sector, where HDFC continues to have a dominant position. Also, the steadily growing subsidiaries add significant value proposition to the stock, making current valuations attractive,” says Lalitabh Shrivastawa, assistant vice-president of research at Sharekhan. On an average, analysts see a 22 per cent upside in the stock over the next year.

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