Increasing competition in the home loan segment as banks switch to marginal cost of funds which will lead to lower lending rates is something investors should track closely. Photo: Mint
When a stock trades at four times its estimated book value for the fiscal year, investors expect a bit of a bang for the buck during the earnings season. While the Housing Development Finance Corp. Ltd’s (HDFC’s) net profit growth of 18.2% was more or less what analysts had forecast, investors were not pleased with other performance metrics. They drove down the stock 2.1% taking some money off a stock, which has rallied 20% since August.
While the housing financier has in general bucked the economic slowdown (this and the previous ones), the September quarter earnings showed that loan growth has slowed further, although marginally. In the three months ended 30 September, loans, including those sold to its unit HDFC Bank Ltd, grew 18% from a year ago. That is slower than the 19% growth seen in the June quarter and 20% growth in the three months ended 31 March.
Secondly, this growth was driven by the lower-yielding retail book that rose 23%. The growth in the corporate book slowed to 8%, which is not surprising given the tepid economic recovery. HDFC’s vice-chairman and chief executive officer said as much in interviews.
Historically, around 68% of HDFC’s loan book has been from the retail segment which has increased to around 71% at the end of September. There is fear in some quarters that this might pressure margins of the company. For now though, spreads are stable while net interest margin improved marginally to 3.95% in the September quarter compared with 3.8% for the three months ended June and 4% a year ago.
The slowdown in loan book growth also meant that net interest income grew at slower pace of 6%. Lower interest earned on shareholder funds due to softening of rates also weighed on the interest income. Thus, the company’s core operating profit (before considering one-offs such as dividends and sale of investments) also grew at 4% compared with 16% in the June quarter. A decline in non-interest income by more than half also contributed.
That said, HDFC’s asset quality remained stable with the gross bad loans ratio at around 0.71%. It has generally been prudent and in the September quarter too raised provisions by almost half from a year ago. The housing financier is also well capitalized to meet a rebound in growth and demand for loans. While its valuations reflect investor confidence, the upside may be capped due to slowing loan growth. Increasing competition in the home loan segment as banks switch to marginal cost of funds which will lead to lower lending rates is something investors should track closely.
The writer does not own shares in the above-mentioned companies.