Housing Development Finance Corporation Limited is an India-based holding company. The Company is engaged in financing by way of loans for the purchase or construction of residential houses, commercial real estate and certain other purposes, in India. The Company's segments include loans, life insurance, general insurance, asset management and others. It offers insurance products, such as motor, health, travel, home and personal accident in the retail division, and customized products, such as property, marine, aviation and liability insurance in the corporate division. It also provides portfolio management, mutual fund, property investment management, project management, investment consultancy and property related services. Its distribution network includes over 4,520 branches and approximately 12,000 automated teller machines in over 2,590 locations. Its subsidiaries include HDFC Investments Ltd., HDFC Trustee Co. Ltd. and HDFC Asset Management Co. Ltd., among others.
Consolidation in Housing Finance will help HDFC:
HDFC should benefit from Housing Finance Companies (HFC) market share consolidation both on home loans and developer lending side as large Tier 1 developers re-orient their borrowing mix towards HDFC even at the cost of slightly higher yields to ensure stability in their funding profile. On home loans as well, whereas HDFC looks well positioned, competition from PSBs especially State Bank of India will be key to watch. We believe that competition in mortgage business remains rational as PSBs and will look to maintain profitability especially after coming out of a large credit cycle. However, with RBI expected to ease rates the market will be more supportive, it can start improving the spreads with business environment for housing finance company getting ease.
Top Notch operating efficiency:
HDFC has the best operating efficiency in the industry with the cost-to income ratio at <7%. Its peers like LIC Housing Finance and Dewan Housing Finance have a cost-to-income ratio of 14% and 40%, respectively. This is mainly due to the in-house sourcing model of HDFC compared to the DSA based model (90%) of LIC Housing Finance and branch-based model of Dewan Housing Finance. Latest, 77% of loans were sourced through HDFC subsidiary while rest 23% were done through DSA mode or through direct walk-in. Further, the lower employee base of HDFC, compared to other HFCs and banks enables the company to maintain such low ratios. We expect HDFC to maintain such operating efficiency, going ahead.
Flexible borrowing profile enables stability in spreads & margins:
HDFC’s sources of funding at Rs 354728 crores, as on Q3FY19, are well diversified and include bank loans (21% of total borrowing), bonds & commercial paper (49%) and deposits (30%). The company, owing to its brand, higher credit rating and sound track record of timely repayments can immediately change its borrowings mix profile to suit its need and take advantage of the prevailing market conditions. For instance, in Q2FY14, when wholesale rates increased to 12% after the RBI’s measure to stem rupee depreciation, the company immediately increased its funding via bank loans to 19% vs. 8% in the previous quarter as the average base rate was around 10.25-10.5%. Such flexibility in the funding profile enables HDFC to maintain a healthy track record of sustaining reported spreads & NIMs above 2.2% and 3.5%, respectively, across volatile interest rate cycles. Further, it earns 1.2% spread on loans sold to banks Rs 6959 crores loans sold in this quarter).
Asset quality to remain stable, going ahead:
HDFC has one of the best asset quality parameters in the industry considering its large size. Owing to slippages in developer loan book slight deterioration in asset quality was seen, with GNPA ratio increased by 9 bps to 1.22% as on Q3FY19 vs. 1.13% in Q2FY19 but overall asset quality remains manageable. Credit costs are lowest in the industry. During FY16, an additional provision to the tune of Rs 450 crore, was made utilizing part of exceptional gains from sale of stake in the life insurance business. In Q1FY18, GNPA witnessed a significant rise due to an exposure of Rs 909 crore turning NPA. However, adequate provision has been made for this account. The major reasons for such a benign asset quality have been HDFC’s conservative lending policies, which enable it to avoid customers defaulting on loans. On an average, it lends only up to 66% of the assessed value of a property/asset. Other reasons include preventing aggressive loan growth or going for higher market share, 90% of individual portfolio belonging to salaried class wherein the default is lower. Further, exposure to real estate developers (13% of the total loan portfolio) is backed by collateral of 2.0x the loan size. We expect the asset quality to remain healthy, going forward, with GNPA ratio expected at 1.23% levels in FY18-20E.
HDFC is one of the best plays for a pick-up in the housing cycle, with a low beta and stable return profile. HDFC’s quality of book is one of the best amongst its mortgage peer group in our view and the company remains the lowest cost mortgage provider in India. With strong brand name, we expect HDFC to continuously increase its market share. Further the company, we believe, should benefit from an improving residential market where a traditional 7-year down turn has ended.
Gruh Finance, the affordable housing finance arm of HDFC Ltd, was taken over in January by Kolkata-based Bandhan Bank in a share-swap deal.As a part of the deal, Bandhan Bank has to transfer 14.9 per cent stake to HDFC for merging Gruh with itself.The deal will allow Bandhan Bank's promoter Bandhan Financial Holdings to come down to about 61 per cent from about 82 per cent, and HDFC to hold around 15 per cent in the merged entity from about 57 per cent in Gruh.The swap ratio for the amalgamation will be 568 shares of Bandhan Bank for every 1,000 shares of Gruh Finance.
Near Term overhang:
HDFC has been asked by the Reserve Bank of India (RBI) to hold only 9.9% or less in the combined Bandhan Bank once its merger scheme with Gruh Finance becomes effective (source: BSE). We observe that this deal additionally increases excess capital at HDFC (3Q19 Assets / Equity of just 5x) and hence will be a near-term drag on ROEs at the standalone level. HDFC, however, could use some of this capital to either look at inorganic growth at the parent level or subsidiaries or keep increasing pay out levels over time which will mitigate the short-term downside.
Given the highly competitive nature of conventional housing finance, most large HFCs operate on thin margins & profitability despite building sizable exposures to non-housing segments like developers, corporates, LRDs, LAPs. Leverage in excess of 10x was the key to generating high teen RoEs. Although most HFCs operate well below the NHB proposed caps of capital adequacy & leverage, we believe that all of them will have to settle for lower leverage & RoEs in coming times.
|Less : Finance Cost||19409.15||20934.56||22280.76||24286.03||26471.77||28854.23|
|Net Interest Income||11495.97||11176.50||12526.54||14350.07||16414.30||18749.31|
|Total Interest Income||11547.42||12225.04||12949.33||14600.07||16714.30||19099.31|
|Operating & Establishment Expenses||163.25||179.20||213.98||230.00||260.50||285.00|
|Administrations & Other Expenses||126.51||138.21||171.02||185.00||205.50||230.50|
|Pre provisional operating profit||10806.08||11187.36||11977.24||13402.64||15278.30||17403.81|
|Provisions and Contingencies||697.98||460.72||395.14||700.00||910.70||1000.50|
|Profit Before Taxation & Exceptional Items||10108.10||10726.64||11582.10||12702.64||14367.60||16403.31|
|Exceptional Income / Expenses||3681.59|
|Profit Before Tax||10108.10||10726.64||15263.69||12702.64||14367.60||16403.31|
|Provision for Tax||3015.00||3284.00||3100.00||3810.79||4310.28||4920.99|
|Profit After Tax||7093.10||7442.64||12163.69||8891.85||10057.32||11482.32|
HDFC Ltd, due to its superior fundamentals, commanded premium valuations compared to its peers. The company has maintained superior return ratios across economic cycles with RoA at 2% - 2.5% & credit growth at 20% CAGR since FY07. With its leadership position intact in the housing finance space, in the current environment, we expect the company to be able to further gain market share and deliver a strong operating performance. We value the consolidated business at 3.90x FY21E ABV indicating target prices of Rs 2427.