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Last Updated : Sep 01, 2016 08:46 AM IST | Source: CNBC-TV18

HDFC's Mistry says demand for home loans never slowed

In an interview with CNBC-TV18, Keki Mistry, Vice Chairman and Chief Executive Officer of HDFC, said the demand for housing loans was going to be strong over the next few years.

Even as the broader real estate sector is said to be in the midst of a downturn, housing finance major HDFC says it has never witnessed a slowdown in demand for home loans.

In an interview with CNBC-TV18, Mistry, Vice Chairman and Chief Executive Officer of the NBFC, said the demand for housing loans was going to be strong over the next few years.

“Penetration levels in India are extremely low, we have a young population and people generally buy a house when they are in mid-30s and with 65 percent of population being below the age of 35 years – all these people over the next 1-5-10-15 need housing loans,” he said from the sidelines of the 12th Anuual Motilal Oswal Investor Conference.

When asked on his outlook for margins, he said HDFC has always focused on spreads and not margins. "Margins are impacted by a host of things and it is usually inversely proportionate to return on equity. So, the focus remains on spreads which for last several years have been in the narrow band of 15 basis points between 2.20 and 2.35 percent," he said. "Going forward too, spreads will continue to remain at current levels."

Post the success of its first masala bond issue, HDFC today has opened second masala bond to raise Rs 500 crore, he said the instrument had opened up a new market for funds. "Global investors will be interested in these."

Below is the transcript of Keki Mistry’s interview to Reema Tendulkar and Nigel D’souza on CNBC-TV18.

Reema: How has demand been for you? The retail loan book disbursement for HDFC limited has been close to about 26 percent. Now with the fact that monsoon has been pretty much normal, it is on track, have we seen an increase in demand for retail loans for HDFC limited? How has demand panned out in the last few months and your expectation going ahead?

A: Historically, we have never seen a slowdown in housing loans in the demand for individual housing loans even at a point of time, a couple of years ago when the economic growth was much lower. So, we have two parts to our business. One is the retail part which is loans we give to individuals for buying houses and the other is loans we give to non-individuals. The individual component has continued to remain strong. We saw in the first quarter and I do not want to talk numbers which are not in the public domain, but if we saw the first quarter of the financial year which is April to June, we saw surprisingly a much higher growth than what we have seen in earlier quarters and we saw the growth coming in at 26 percent.

So, hopefully, over the next couple of years, we would expect to continue seeing a reasonably strong demand for individual housing loans. You have to understand the basics on why the demand is strong. The demand is strong on the back of the fact that penetration levels in India are extremely low. We have a fairly young population and people generally buy a house only when they are in their mid-30s. And with 65 percent of the population being below 35 years of age, all these people will progressively, over the next 1-15 years need housing and therefore housing loans. So, on a structural basis, my sense is demand for housing in India will always remain strong.

Reema: So the numbers, the growth rates that we saw in Q1, do you believe they are sustainable?

A: I do not know whether 26 percent growth is sustainable to be honest with you. We have never targeted 26 percent growth in history, but if it continues, well and good, we will be very happy.

Reema: So, what is your target? You are saying 26 percent is never targeted. What would be the comfortable range?

A: We have never given forward making statements. The only statement we have made historically to our investors is that over the next 3-7 years, we would look at a 15-18 percent growth in our individual loans business. But now, historically, this is a statement we have been making for several years. Having said that, if we take the last five years or for that matter, the last 10 years, compounded annual growth rate (CAGR), it has been somewhere in the 20s.

Nigel: You are sounding quite positive with the outlook for the next few years. Margins have been around 3.8 percent or thereabouts. What is the trajectory going ahead? Do you believe it can hold on to these levels?

A: I would never look at margins that closely. I would look more at spreads because margins get impacted by a whole host of issues which have nothing to do with the corporate business. For example, it depends on the quantum of capital that raise, the amount of debt equity ratio that you carry in the balance sheet. So, margin is inversely proportionate to return on equity. So, what we really target is spreads. And if you look at the last several years again, and you will see this on our website, our spreads have ranged in a very narrow band of around 15 basis points, between 2.20 percent and 2.35 percent. And we see nothing today, which would make us believe that spreads would not remain within this range.

Whenever spreads go beyond a certain level, we always pass the benefit back to our customers by reducing lending rates and again when spreads fall below a certain level, we increase our lending rates. We have seen a fair amount of liquidity in the system, incremental borrowing costs have really come down, no question of a doubt about that. However, for that to translate into a significant growth in the balance sheet, to enable us to drop lending rates is something we keep evaluating on a continuous basis.

Reema: Your second masala bond is open today. Your first one was of course, highly successful. Two part question. How does it change your cost of funds structure, these masala bond? And secondly, would you be looking at this route more to raise funding?

A: For us, money is raw material. Our disbursement needs are close to Rs 10,000 crore per month. If you look at retail and non-retail, a little under Rs 10,000 crore. So, for us, this new masala bond issue that we are doing of Rs 500 crore is not going to make a material impact in terms of cost of funds. But the way the first masala bond has traded, it has traded up significantly which means the yield to the investor has come down quite a bit. The yield to a new investor would have come down quite a bit. My sense is when we closed this issue, and we would price this issue, there is a T plus three period which is there. Once that gets announced, I am sure the pricing will be much lower than what the last pricing was. The last issue was done at 8.33 percent yield-to-maturity (YTM) and this should clearly be done at a much lower yield.

And on the masala bond, as I said, Rs 10,000 crore is our monthly disbursement need, so we need to raise money from a variety of sources. Masala bonds has opened up, the markets have now opened up, we believe that the appetite for foreign investors to invest in India is huge. Given the fact that India’s economy today looks very strong. And given the fact that global interest rates are very low.

Reema: Your individual loans have been growing at a faster rate than corporate loans. Have we seen a pickup in corporate loans because the market is keenly awaiting when we will see a turn in the earnings growth for individual stocks. And one way to judge that would be the fact that if corporate loans are picking up. What is your sense on that?

A: before I answer your question on corporate loans, it is important to understand individual business also. Our individual business is sourced through a variety of channel partners. And to all these channel partners, we pay them a commission or a fee for getting business for us. We charge that entire commission to our profit and loss (P&L) account upfront. We do not amortise that over the life of the loan. So when the individual business grows at a faster pace, it has an implication in terms of accounting profits because the commission would have been charged to the P&L account up front.

Now talking of corporate business, there are three categories of corporate business. One is corporate loans which is loans given to companies for their own real estate requirement, their own offices or for giving loans to the employees, the other is lease rental discounting (LRD) loans and the third is construction finance. As far as the construction finance portfolio is concerned, the demand has continued to remain strong. It frankly never slowed down. Construction loans today constitute 13 percent of our total book and if you were to go back to 2007, the number would have been more or less similar. Where there has been a slowdown, it has been in the other two categories which is corporate loans, which in 2007 would probably have been 13-14 percent of our book and that number today is percent of our book. And LRD which at one time would have been 9-10 percent, today is 5 percent.

So, these are the two categories where there is a slowdown. Now we had seen some traction, we have seen a lot of traction if you ask me. How much of that gets disbursed in the next 1-2 quarters, I honestly cannot answer, but having said that, if you look at the fourth quarter of the last financial year, January to March, we saw a very sharp pick up in that segment. So if I recall right, we had nearly Rs 4,000 crore of disbursements that were made in that period. It was not Rs 4,000 crore of disbursement, it was Rs 4,000 crore growth in the loan book which is substantial.

So, my sense is as economic activity picks up and I have no doubt in my mind that that will happen. Given the fact that as you mentioned, monsoons have been good, number one, number two, the macro looks superb, macro in India has never looked as good as it does today. Current account deficit is under control, fiscal deficit is low, RBI has built up reserves, inflation has been fairly managed, currency has been fairly stable. So, macro India looks very strong and that has to, in the very near future, translate in to larger investments. And the monsoons could clearly facilitate that process.

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First Published on Aug 31, 2016 11:56 am
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