HDFC rated ‘Outperform’; Credit Suisse says recovery of retail mortgage demand is on track

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Published: April 1, 2017 2:39:36 AM

The government’s recent scheme on affordable housing is quite attractive (equivalent to 4-10% discount on property upfront) and should further boost retail demand.

Keki Mistri, HDFC Bank, Asian Investment Conference 2017, demonetisation, Retail mortgage, HDFC Retail mortgage, SBI , General insurance businessesThe government’s recent scheme on affordable housing is quite attractive (equivalent to 4-10% discount on property upfront) and should further boost retail demand. (Source: Reuters)

We hosted Keki Mistri, CEO, HDFC Ltd at Credit Suisse’s Asian Investment Conference 2017. Management highlighted that retail mortgage growth has started recovering post the demonetisation disruption and the number of logins (fresh applications) in Feb 2017 was 36% higher from the absolute low of December 2016. The government’s recent scheme on affordable housing is quite attractive (equivalent to 4-10% discount on property upfront) and should further boost retail demand. HDFC with average ticket size of `2.5 million has a meaningful presence in the mid-sized property segment and could be a larger beneficiary of the scheme.

Management expects spreads to remain broadly in their historical range (225-235 bp) even with lending rate cuts on the drop in funding cost. With the change in RBI policy stance, the risk of further lending rate cuts by the banks seems quite low now. HDFC’s mortgage growth and profitability have stayed intact even with the rising focus of banks on the segment. The recent lending rate cuts and incentives for affordable housing should boost disbursement growth back to pre-demonetisation levels. Outperform.

Retail mortgage growth picking up: Retail mortgage growth has started recovering post the demonetisation disruption (retail disbursements slowed to 3% y-o-y from 20% in 1H) and the number of logins (fresh applications) in Feb 2017 was 36% higher than the absolute low of Dec 2016 (+11% y-o-y).Overall it remains on track for 15% growth in disbursements for FY17. The government has made several announcements to boost the affordable housing segment, including granting it infrastructure status, tax incentives to developers, and subsidising the low-income group. Recently, it has announced a new scheme which significantly expands the scope of affordable housing by extending credit-linked subsidies to the middle-income group as well. The scheme is quite attractive (equivalent to 4-10% discount on property upfront) and should further boost retail demand. HDFC with average ticket size of `2.5m has meaningful presence in the mid-sized property segment and could be a larger beneficiary of the scheme.

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Competitive intensity remains manageable as even with the sharp lending rate cut, SBI has increased the spread for mortgage loans. Further, as funding cost has come down over the past 12 months as well, HDFC’s management remains confident of maintaining spreads broadly within the historical band (225-235 bp). With the change in RBI policy stance, the risk of further lending rate cuts by the banks is now quite low, in our view.

Significant value unlocking likely from listed and unlisted subsidiaries: Management highlighted the conglomerate value of HDFC Ltd stating that the gains on listed investments are $11 bn, while it estimates gains on unlisted investments at $7 bn. Listing of Life and General insurance businesses can help unlock value. HDFC’s mortgage business growth and profitability have remained intact even with the rising focus of banks on the segment. The recent lending rate cuts and fiscal incentives for affordable housing would boost disbursement growth back to pre-demonetisation levels (20% in H1). Maintain Outperform.

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