HDFC's loan exposure to wholesale, developer segments may impact its stock

Housing finance major HDFC has been one of the noticeable laggards among heavyweight stocks in recent times.


Since the beginning of 2019, the stock has lost about six per cent against the BSE Sensex’s four per cent gain. But first, the positives. HDFC is well insulated despite the recent tightening of regulatory norms. With capital adequacy at over 17 per cent and borrowing to net owned funds ratio at 6.2 per cent, investors don’t have any regulatory pressures to deal with.


Yet, there could be possible concerns from the housing financiers’ 27 per cent exposure to wholesale and developer loans. Slowdown in its core housing loan segment is also a concern. Signs of these were felt in the December quarter (Q3).


For the first time in recent quarters, HDFC’s non-performing assets (NPA) ratio saw a noteworthy spike in Q3. much of the pressure came from its wholesale loan exposure — that is, loans to real estate developers. From 1.13 per cent and 0.35 per cent gross and net NPA ratios, respectively in Q2, the numbers rose to 1.22 per cent (gross NPA ratio) and 0.43 per cent (net NPA ratio). Wholesale loans’ gross NPAs rose to 2.5 per cent — a 30 bps rise from the past five-quarter average. Meanwhile, provision coverage ratio fell to 65 per cent in Q3. All these weighed on the financier’s performance.


Net profit saw a 10 per cent rise only, after adjusting for profits from sale of investments (net of taxes), though its profitability hasn’t been affected yet.


Net interest margin (NIM) rose 13 bps sequentially to 2.8 per cent in Q3, reflecting its pricing power despite tough operating conditions. However, whether this would last long needs to be seen, given that spread or absolute difference between returns on loans and cost of loans declined 17 bps sequentially and 35 bps year-on-year (YoY) to 1.29 per cent.

Another noticeable blip was in the loan growth, which fell short of its historical run rate. Thanks to its market leadership and strong network, HDFC’s loan book grew 12.7 per cent YoY and its assets under management increased 15 per cent YoY. It is among the few housing financ­iers to see growth on these parameters. Yet, when gauged against its historical growth rates, Q3 was the weakest in 17 quarters, led by lower disbursals in the wholesale segment. Analysts at Antique Stock Broking feel despite HDFC remaining the best placed housing financier, it may not be prudent to assume that HDFC will gain market share, given the continued presence of large banks in the sector.

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