The best days are yet to come for HDFC

HDFC’s profitability stems from a significant level of active provisioning. At the end of the September quarter, the lender had worth provisions ₹13,340 crore, much more than ₹6,605 crore that would be required by regulatory norms, the company said in a statement. it holds ₹1,304 crores especially for pandemic risks. The company said it may continue with the provisions.

Clearly, HDFC shares derive the majority of their premium valuation from this level of insurance against crime risk. As such, the lender has been able to put a hold on its defaults even during the pandemic. Bad loans as a percentage of total loans stood at 2%, lower than most peers. In fact, on a sequential basis, HDFC showed marginal improvement in delinquency rates as reflected by the decline in gross bad loan ratio. Also, the stock of Gross Bad Loans fell 7% from the previous quarter.

Another sign of de-stressing is collection efficiency which came in at 98% for the quarter. The lender has been able to show a quick recovery from the effects of the pandemic’s second wave, thanks to theft of its balance sheet and a general pickup in economic activity.

But there is trouble on the margin front for the lender. HDFC’s bad loan ratio for non-personal ledgers remained high at 4.7%. This is a matter of concern, especially as there has been an increase in home sales and launches during the festive season. Improvement in home sales bodes well for realty developers and improves their risk profile. Did not think so.

To be sure, the lender has pointed out that the stress of this portfolio is easing. In addition, HDFC has a restructured debt pile of more than ₹7,000 crores. Granted, as a percentage of the total book, it’s just 1.4%.

Nevertheless, this agglomeration needs to be monitored as around 60% of it is from secured personal loan book, while the rest are loans to developers and construction finance.

This brings us to the other factor that supports evaluation: growth. The lender has been shrinking its non-personal loan book even before the pandemic. The portfolio shrank 4% year over year for the September quarter. HDFC has indicated that its non-personal book will show growth in the coming quarters.

“We have a reasonably healthy pipeline. I expect we should close the financial year on a positive growth figure,” the company’s managing director Keki Mistry said in a call with analysts. For the September quarter, HDFC managed a 10.5 per cent growth compared to a year ago. Reported healthy assets under growth, driven by a 15% increase in personal loans.

Loan disbursements showed a rapid revival with retail disbursements jumping 44% over the year-ago period. Low interest rates coupled with discounts in the festive season have prompted Indian consumers to buy homes, helping lenders like HDFC. And, the company expects that trend to continue.

The increase in home sales and project launch during October is an optimistic sign for continued credit growth. While competition in the home loan market has increased, analysts were confident that the lender would face challenges as it has done in the past. In short, HDFC’s growth is expected to improve from here.

As the largest non-bank mortgage lender, HDFC has enjoyed premium valuations primarily due to its pristine asset quality. But its balance sheet has remained untouched by the pandemic and slowing growth. While credit growth for the September quarter has increased to 10% from 8% a quarter ago, it is still below the historical trend of 12-13%.

“HDFC remains the best among competitors for asset quality, which is an important consideration, but growth should improve as well,” said an analyst on the condition of anonymity. He said the evaluation now shows the most positive.

The stock has moved with the broader market over the past six months which reflects this. For HDFC stock to outperform, the key component of growth would need to align with its historical trend.