A competitive environment could put pressure on the home loan major’s profits.
The HDFC stock hit a two and a half year low on Wednesday to close at Rs 1161. 60. While the stock is held by several foreign institutional investors who have been selling heavily over the past ten days, the Street is also now more concerned than before that the home loan major’s earnings growth is going to be worse than expected.
That there are fewer takers for loans was evident in the marked slowdown in loan approvals in the December 2008 quarter. But the stock has been coming off ever since the State Bank of India (SBI) announced home loans at 8 per cent for the first year with the interest for subsequent years pegged to the bank’s prime lending rate (plr). That was in early February and since then a couple of other banks too are offering cheap loans, some at 8.5-9 per cent without the one year rider. That could mean fewer lending opportunities for HDFC in a very difficult environment.
Since it doesn’t have access to retail deposits the way commercial banks do, its spreads could be under pressure if it reduces rates. Even when things hadn’t turned so bad, in the December 2008 quarter, the growth in pre-exceptional earnings, at just 13 per cent was clearly disappointing, with approvals falling 7.6 per cent y-o-y. Although this was partly because of fewer loans given to corporates, even loans to individuals didn’t rise too much at just 5-6 per cent. Analysts believe demand could stay subdued allowing the net interest income to grow by more than 16-17 per cent next year over the estimated Rs 3,300 crore in 2008-09.
Given its superior management, HDFC should not see any significant increases in non-performing loans and therefore should not also need to provide more for them. However, despite this, net profits after adjusting for exceptionals are expected to grow by 17-18 percent in the next couple of years. That would be disappointing because HDFC has almost always managed to grow profits by at least 20 per cent.