With signs of improvement becoming visible in the housing segment, housing finance companies are being watched closely again. And the leader of the pack—HDFC is set to gain from the growth in mortgage market. Stronger GDP numbers and a pick up in the economy is also an indicator for this. Mortgage growth rose by a multiplier of 1.8 times of nominal GDP growth, say analysts at JP Morgan. With GDP growth likely to pick up, they expect mortgage growth to stay robust. Moreover, India’s mortgage penetration at 6% is still extremely low when compared to the 20-40% penetration recorded in several South East Asian nations. Even China has double penetration than India. And despite the mortgage penetration improving from around 1% in 1997 to 6% currently, the housing shortage remains and will keep creating growth opportunities. And by that measure will also attract competition. HDFC would keep facing competition from commercial banks. However, it is expected to remain on the top as it has huge flexibility in procuring funds. It has managed to maintain net interest margins at around 3.5% as its costs of funds is lower than 7.5% and the yield on assets is at 12%. Analysts expect this to be maintained. At the moment 38% of its funding is sourced from loans, 39% debentures and 23% deposits. The unique part of HDFC’s strategy is that when interest rates are low, HDFC gains because its wholesale funding costs fall dramatically, given its ability to borrow from banks and bonds, point out analysts. This was witnessed in two quarters of 2009-10, when spreads improved dramatically. When rates rise, it can switch to retail borrowing as its retail borrowing franchise remains robust. Little wonder then that HDFC’s lending business generates a return on equity of 22-26%, when the capital is adjusted for investment made in subsidiaries. This, reckon analysts, is the global best in class for a pure lending business.