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Housing Development Finance Corporation (HDFC), the largest housing finance company, recorded net growth of 54% to Rs 2.190 crore in the first quarter of fiscal year 19 and strong growth in loan portfolio . The latter remains strong and margins are stable, although the transition to Ind-AS has resulted in the reprocessing of some positions
The stock has outperformed the year so far, but much remains to be done. While the core mortgage lending business is on a steady growth path, the financial conglomerate should take advantage of the equally strong performance of its subsidiaries. Investors can not ignore this financial strength.
Growth and line of credit are the two main controllable features of HDFC and have not disappointed either. Despite its large size (high base), HDFC is increasing its mortgage book faster than the industry. On the margin front, spreads continue to remain within a narrow range of 2.2 to 2.35%, regardless of the interest rate cycle. While competition has intensified in the housing segment, the current interest rate cycle should not change the lender's finances significantly as it continues to benefit from financing through other non-bank financial corporations.
Credit growth, non-dissuasive size
The total volume of loans was 371 988 crores at the end of March, up 19% year-on-year (year-on-year). Total loan portfolio growth after adding loans sold in the previous 12 months was 23% year-over-year. The individual loan portfolio grew 19% year-over-year (25% after the addition of loans sold) and now accounts for 72% of the portfolio's total volume. The non-individual portfolio grew by 17%, helped by traction in discounting rents and financing construction.
Management is increasingly targeting segments of the economically weaker portion and LIG in affordable housing. The latter accounted for 37% of approvals (additional sanctions) in volume and 19% in value during the first quarter. The average loan size for the EWS and LIG segments was Rs 10.1 lakh and Rs 17.6 lakh, respectively, much smaller compared to the average loan size of Rs 26.7 lakh in the individual segment. The decline in ticket size in an affordable segment means that growth will depend on volume and will depend on project launches.
HDFC is expected to benefit from structural growth factors in the sector (GDP growth, sub-penetration of mortgages, etc.) (interest subsidy program, tax incentives, housing for all by 2022, status of Infrastructure afforded affordable housing). Despite its size, the growth of its loan portfolio seems sustainable.
Spreads are stable, helped by a diversified financing profile
Spreads in the global pound remained almost stable at 2.28% (individual pound: 1.91% and non-individual pound: 3.14% ) demonstrating the ability of the company to maintain the same level between interest rate cycles, in the context of increasing competition.
The HDFC resource profile is well diversified. This allowed him to maintain his cost of competitive financing. The majority of its financing comes from borrowings on the debt and fixed deposit markets, representing respectively 57% and 29% of the total loans as of March 31st.
In addition to its low funding costs, its resources mitigate the disparities inherent in land tenure and interest rate risks in the housing finance (HFC) sector. We are encouraged by the fact that HDFC manages a well-matched ALM portfolio with smaller gaps in the medium-term compartments compared to peer HFCs.
Impeccable quality of badets, excessive provisions amortize
loans to 1.18 percent, the quality of badets continues to be pristine. Nonperforming loans in the individual portfolio were 0.66%, while those in the non-individual portfolio rose to 2.32% at the end of June. Management's policy of creating 30% provisions from one-time profits resulted in total provisions at 1.27% of the loan portfolio, which exceeds regulatory requirements.
According to Ind-AS, the lender's badets were clbadified according to default exposure (EAD). As a result, HDFC revealed standard stressed badets (Level 3 badets) of 2.52%. It has adjusted excess provisions outstanding in the balance sheet against stressed badets, which results in a provision coverage ratio of 28%. Since HDFC has provisions that exceed regulatory requirements, its net worth has not been affected by this adjustment. The impact of the transition to Ind-AS on its network will be reported in the next quarter.
Improving Affiliate Performance
HDFC's superior performance is not limited to its mortgage business. Its subsidiaries (HDFC Bank, GRUH Finance, HDFC Standard Life and HDFC Asset Management Company) have a track record. Subsidiaries and badociates contributed 33% of consolidated profit for the fiscal year18. With the increase in the size and profitability of subsidiaries, more than 50% of the value of the company now comes from subsidiaries. Well capitalized
The company is well capitalized after raising a capital of Rs 13,000 crore and warrant conversion. He used Rs 8,500 crore of the product to maintain his stake in HDFC Bank (he raises capital in view of his promising growth prospects) and plans to use rest for inorganic growth. The initial public offering in progress of HDFC AMC will result in additional capital gains. Attractive valuations The company should be able to maintain a core return on badets of 1.8% and a return on equity of 17% This percentage is supported by strong loan growth, margin stable, stable badet quality and a low cost / income ratio of about 7-8%. The considerable value being created by the subsidiaries, at the current market price, the core credit activity is valued at 2 times the estimated book value of fiscal year 20, a significant discount from its average historical. ] We recognize that baseline earnings growth in the middle of adolescence is lower than that of many smaller HFCs. However, HDFC's ability to provide consistent performance across rate and growth cycles despite its large size and strong competition drives a high premium to its peers. It's a rarity to find a quality financial services franchise (not just a housing finance game) at a reasonable appraisal. Investors should use this opportunity to buy in the stock.
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