Housing Development Finance Corporation (HDFC) is India's largest provider of housing finance, primarily focusing on retail housing. It deploys its service through direct selling agents (DSA). Apart from the core business of mortgages, HDFC has diversified its business through its subsidiaries viz., HDFC Standard Life Insurance, HDFC Asset Management Company, HDFC Bank, and HDFC General Insurance Company.
Government’s thrust upon the housing sector
HDFC has positioned itself well in the time when there has been strong support from the government towards promoting the housing sector. The housing finance major has launched HDFC Reach home loan scheme, to target consumers from the middle income group category and has witnessed strong momentum in the government’s credit-linked subsidy scheme (CLSS).
In the first quarter of fiscal 2017-18, HDFC saw strong pull in its disbursements given the pre-pone demand prior to the implementation of Good and Services Tax (GST) and Real Estate Regulatory Authority (RERA) and the launch of its schemes. However, this will be partially offset by higher industry prepayment rates. Implementation of GST for the sector would make housing affordable and RERA offers to bring fair practices that would protect the interests of investors and impose penalties on errant constructors.
Along with the given high asset base, sustainability of momentum will have significant impact on the overall book growth. The loan growth expected over the 2017-19 period is 16-17 per cent post sell-downs, primarily led by decent traction in individual loans.
Asset quality monitoring
Since the last two quarters, few non-individual accounts of HDFC have been under stress that leads to monitoring of the asset quality performance of the segment.
The Internal Advisory Committee (IAC) set up by the Reserve Bank of India (RBI) focuses on large stressed accounts and takes in consideration the accounts which were classified partly or wholly as non-performing from amongst the top 500 exposures in the banking system. In June 2017, the IAC identified 12 accounts totaling about 25 per cent of the current gross non-performing assets (NPAs) of the banking system that would qualify for immediate reference under Insolvency and Bankruptcy Code (IBC). These accounts are referred by banks to the National Company Law Tribunal (NCLT).
For the quarter ended in June 2017, there was a risk of increase in NPAs in the non-individual category for HDFC, as the bank had an exposure of Rs 909 crore towards a NCLT-referred account; however the bank had adequate provision against this exposure, thereby which would have minimal impact on the profitability.
In the second half of the fiscal year 2017, HDFC has created provision of Rs 240 crore on account of one of the developer accounts sold to an Asset Reconstruction Company (ARC) for security receipts issued to HDFC amounting Rs 705 crore.
Restructuring of HDFC Life and Max Life merger
The existing structure of HDFC Life and Max Life merger has hit a roadblock at regulatory level, which may lead to direct merger of the two subsidiaries instead of merger with Max Financial. In case, the merger initiates under the new structure, the listing of the merged entity will follow within a quarter post merger. Or else, HDFC Life would list itself on standalone basis by middle of December 2017.
Also, HDFC is in consideration of listing both the life insurance and asset management businesses in the current fiscal year, which has potential value discovery.
As the other banks switch to marginal cost of funds based lending rate (MCLR) regime and with lower interest rate, there is less chance for improvement of net interest margins (NIMs) for HDFC. Along with this and moderate fee income, HDFC’s core revenue would be slowed down. In spite of the challenges faced by HDFC, its market leadership, adequate provisioning and best-in-class cost ratios will facilitate 14 to 16 percent growth in operating profit and expect return of equity (RoE) of 20 percent in financial year 2018-19.
Apart from the risks that are inherent in the mortgage business – fraud risk, accumulation of non-performing asset (NPA) due to increase in interest rates and decline in property prices, HDFC faces risks of increase in competition and sustained slack in the mortgage market can lead to lower growth.