On Stronger Turf

Updated: Oct 20 2002, 05:30am hrs
HDFCs improved performance during the first half to September 2002 re-affirms its dominance in the housing finance industry. It has upped spreads on its home loan portfolio by 50 basis points to 2.01 per cent in spite of severe competition from ICICI Bank, SBI and foreign banks. Sanctions during the six month period (April-September 2002) at Rs 5,295 crore were up 30 per cent, while disbursals at Rs 4,222 crore 32 per cent. Retail growth of 37 per cent in individual loan sanctions as well as approvals is quite robust. This growth has spilled over into its topline that went up by 12.7 per cent at Rs 1,418 crore while net profit grew 21 per cent at Rs 304 crore.

HDFC has decided to reward its shareholders on its 25th anniversary with a 1:1 bonus. It has also decided to go in for a buyback of five per cent of its equity capital subject to board approval in December 2002. It should also get an exemption from the central government under section 77A(2)(d) of the Companies Act, 1956 that restricts a company from buying back its shares if its debt equity ratio exceeds 2:1. The moot point however is why should HDFC return capital at a time when housing business is growing at a clip of 30 per cent per annum. Why not grow assets instead

HDFC says the move has been prompted by the reduction in risk weightage of mortgage securities from 100 per cent to 75 per cent. It may be reduced further to 50 per cent. This will result in higher profitability. And thus Capital Adequacy Ratio (CAR) too may go up from the current 13.9 per cent to about 16 per cent comprising only tier I capital. As and when the buyback is effected, the CAR is likely to come down to 12-13 per cent. The equity base will expand after the bonus issue.

However, buyback may help the company counter growing shareholder expectations of higher dividends as it may bring down the nominal rate of dividend. It must be mentioned that the dividend rate has been 250 per cent, 125 per cent and 190 per cent during the last three fiscal years. The move will also give a further fillip to active trading in the scrip.HDFC also kicked off its general insurance venture with Chubb Corporation which is a 26 per cent partner and brings in Rs 47.5 crore for the stake in addition to an interest-free loan of Rs 24 crore. The general insurance venture almost completes HDFCs portfolio of an entire gamut of financial services comprising mortgage business, banking, asset management, life insurance and call centres.

The domestic general insurance business is worth about Rs 11,000 crore in terms of premium income. It is expected to grow at 15 per cent per annum. The nascent market with little product sophistication has growth potential. However, the new venture may take quite some time to post substantial growth.Going forward, a strong demand for housing loans backed by fiscal incentives will only further HDFCs growth at least in the near term because of its sheer size and dominance of the mortgage market.