The sharp drop in HDFC’s standalone profit growth to 1.2 percent in the first quarter of 2015-16 (ended June) is less a comment on the housing finance pioneer’s lack of performance than an indicator of the sorry state of India’s economy and its real estate sector.
If things continue this way, it may hasten HDFC’s merger with its bank, HDFC Bank.
The real estate sector, which is a key driver of growth and jobs, has been floundering on the rocks of buyer resistance, thanks to over-priced property. This BusinessLine report says supply is outgunning demand for three reasons: banks are unwilling to lend as they have too many bad loans in this sector; two, the NDA government’s success in cutting subsidies means less black money is being siphoned off from the udders of the welfare state (most of it goes into realty); and, lastly, public knowledge about high unsold inventories makes home buyers reluctant to buy even if they have the money. According to this Firstpost report, two lakh homes remain unsold even now in just the Mumbai metropolitan region.
Real estate no longer makes for a good investment as rental yields are at 2 percent or less. Even a savings bank account is better than pricey real estate as investment right now. Realty prices will have to fall by 30-40 percent to make property a sound investment again.
To return to HDFC, as one of India’s best-run companies, it has no problems growing its loan-book. In the first quarter, it grew individual loans 23 percent and corporate loans 10 percent.
But the worry signs are embedded in these numbers: despite the huge uptick in home prices, the average size of an individual HDFC loan is just over Rs 23 lakh – and static. This can only mean that purchasing power is not keeping pace with house costs. A few big ticket loans may be keeping this average up even when the total number of loan seekers may be dropping off or staying stagnant due to the unaffordability factor.
Unaffordable means limited prospects for real loan growth for HDFC.
While HDFC’s low profit growth in the first quarter may be a one-off – apparently, the dividend income from HDFC Bank worth Rs 315 crore is being booked in the next quarter unlike last year – the slowdown does not seem to be a passing phase.
This is apparent when one compares the company’s profit figures over a larger number of quarters. The average quarterly growth in standalone net profits was 12.5 percent in 2013-14, and this fell to 10.4 percent in 2014-15. In fact, in the last four rolling quarters (July 2014-June2015) the average is down further to 7 percent. The trajectory of HDFC’s profit growth is clearly downward.
If HDFC is still maintaining reasonable profit growth, it may be because it has been adroitly managing its loan portfolio, selling loans at a profit to other companies. In the last 12 months, HDFC sold Rs 10,949 crore worth of loans, and the total loans sold (or assigned to others) is Rs 27,764 crore – on which it continues to earn residual interest of 1.24 percent per annum.
In other words, HDFC makes a margin on these old loans even after selling them to other finance companies or banks that want to expand their loan books, even at lower interest margins.
It is quite possible that HDFC has sold some of its older loans which bore higher interest rates now that the rate regime is shifting downwards. This process cannot continue endlessly as even HDFC has had to drop loan rates and margins from sale may be thinning down.
The sale of loans is also indicative of HDFC’s desire to manage the size of its balance-sheet, given that its access to funds depends not on savings and current account deposits (as is the case with banks), but on long-term funds from various sources.
In Arun Jaitley’s first budget last year, the government allowed banks to raise long-term funds for infrastructure (including housing) without having to provide for cash reserve (CRR) and statutory liquidity ratio (SLR). This means even banks can get funds on terms similar to what HDFC can get from various sources.
Logically, it now makes sense for HDFC to merge with its bank and create a mega financial powerhouse. The only thing holding it back is its legacy borrowing, which will now attract CRR and SLR if it merges with its bank. HDFC Vice-Chairman and CEO Keki Mistry said as much to Business Standard: "HDFC’s balance-sheet was not created out of current and savings account deposits but out of long-term funding. But if HDFC is merged with the bank, then we will have to credit for (ie, provide for) CRR, SLR and priority sector (lending) as well. It would be great if only we need to provide for it on the new loans that are disbursed and not on the old balance-sheet."
But perhaps by keeping its balance-sheet growth limited, HDFC is preparing for that day.
The writer is editor-in-chief, digital and publishing, Network18 Group.