Loan growth is slowing and may moderate further, but the quality of asset portfolio remains good.
What seems to have spooked the Street about HDFC’s December 2008 quarter numbers is the fall in loan approvals both sequentially and on a y-o-y basis. Besides, investors were also somewhat taken aback that disbursals too fell sequentially though they were higher on a y-o-y basis.
As such the disbursals to approvals ratio for the quarter came in at around 95 per cent, somewhat higher than the 76-80 per cent typically seen.
The reason for the loss of momentum is that HDFC has been lending less to developers. That may not be such a bad idea given the condition that most developers are in today.
If numbers for retail borrowers alone are considered, approvals were up 22 per cent y-o-y during the quarter while disbursals rose 28 per cent y-o-y. If these numbers don’t seem as exciting as in earlier quarters, it was only to be expected at a time when consumer confidence was ebbing and asset prices were still way out of reach.
Also, HDFC, unlike banks, doesn’t have easy access to retail deposits and sources more than 80 per cent of its borrowings from the wholesale market. So it does end up paying a little more than banks; it also needs to protect itself from any potential asset-liability mismatches.
In fact, expenses on interest rose sharply during the quarter, indicating the higher cost of funds which rose by about 15 basis points to just under 10 per cent. So, the HDFC stock didn’t really deserve to be punished the way it was done on Wednesday because, in a particularly difficult quarter, the home loan major managed to earn a spread of 2.1 per cent, a sequential fall of just 10 basis points. Besides, the post-tax profit , after adjusting for exceptionals and profits on the sale on investments, was up 15 per cent y-o-y.
More importantly, the quality of the portfolio remains top class---net non-performing loans (NPLs) at the end of the December 2008 quarter were actually lower at 1.01 per cent compared with 1.04 per cent at the end of September 2008 quarter.
For the six month period too, net NPLs were lower. That is extremely creditable at a time when banks are expected to see NPLs piling up in the retail space and are scrambling to make more provisions to clean up their balance sheets.
For sure, loan growth is moderating. But, then the economic environment hasn’t been easy at all with interest rates just beginning to ease. It will take consumers a long time before they are comfortable with making large-ticket purchases like homes when they are unsure about their jobs and salaries and asset prices are high.
HDFC’s book may grow at just around 18- 20 per cent in 2009-10, much below the 30 per cent that the Street is used to. As long as the portfolio remains clean, that should be fine.
