Housing loans have been the corner stone in the chase for retail lending by banks and even non-bank lenders for long. In fact, they formed 8.4 percent of the total incremental loans given by banks so far in FY22. Add that of non-bank lenders and the share rises even further.
HDFC Ltd, being the market leader in home loans among non-bank finance companies (NBFC) has shown resilience even during periods of crises such as the present one triggered by the COVID-19 pandemic. HDFC’s assets under management has grown by a healthy 19.7 percent in the past two years despite the pandemic. This, along with pristine asset quality, has underscored the company’s premium valuation with the stock climbing above pre-pandemic highs.
But, since the past six months, the stock has underperformed the broad market even as various economic indicators show improvement, including the real estate sector. HDFC’s shares have dropped 11 percent in the past six months as against the 4.4 percent gain in the broader Nifty 50 index. In fact, consumer goods lender Bajaj Finance's valuation briefly crossed that of HDFC earlier this week.
There are a few reasons behind this underperformance. One, home loan growth has been fuelled by multi-year low interest rates. The interest rate cycle has turned now with the Reserve Bank of India (RBI) in withdrawal mode.
HDFC is predominantly a retail home loan lender with individual loans forming 77 percent of its book. But it has also been a big beneficiary of low interest rates. Analysts foresee some headwinds on growth here given the expected increase in interest rates. The turn in rate cycle also means that HDFC’s cost of borrowing may inch up, crimping margins. As such, corporate bond yields have already increased over the past six months.
The management, however, has indicated that loan growth would improve further as momentum has continued. “Although interest rate cycles may move up and down, customers who want a home will not hold back,” said Chairman Deepak Parekh in a recent event.
HDFC’s asset quality metrics slipped somewhat in the third quarter with the lender reporting an increase of 20 basis points in its Stage 3 assets (non-performing loans). These loans stood at 2.7 percent of total portfolio. A worrying aspect was that individual loans contributed to this increase of stressed assets. But this has more to do with change in regulator’s rules than fresh stress.
Analysts at Jefferies India Pvt Ltd believe that the ratios would normalise over three-four quarters.
Performance of non-individual loans which are essentially loans to developers, and construction loans improved with delinquencies falling by 1.3 percentage points sequentially.
What’s more, the lender has said that it recovered Rs 683 crore from a single non-individual loan account that was restructured in the third quarter. Analysts expect HDFC to report further improvement here in tandem with the recovery in the economy.
HDFC has also been dragged by underperformance of its group companies. Shares of HDFC Bank, HDFC Asset Management Company Ltd and HDFC Life Insurance Company Ltd have all slipped over the past one year for varied reasons.
Analysts believe that the current underperformance is likely to be temporary for HDFC. In fact, the fall has made valuations look more appealing for investors now in comparison to others. Brokerages have not materially changed their expectations. “We expect HDFC to deliver a 14 percent AUM and PAT CAGR each over FY22-24. This would translate into an RoA/RoE of 1.9 percent/13 percent in FY23-FY24,” Motilal Oswal Financial Services analysts said in a note.
Expectations on return on equity (RoE) are lower than pre-pandemic level of 15 percent.
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