Housing Development Finance Corporation Limited

Transcription

1 1 Housing Development Finance Corporation Limited November 2013 INSTRUMENTS RATED Rs.250 Billion Non-Convertible Debenture Issue Non-Convertible Debentures Aggregating Rs Billion Bonds Aggregating Rs Billion Subordinated Debt Aggregating Rs.50.0 Billion Rs.250 Billion Short-Term Debt Fixed Deposits Date Rating Drivers Long-Term RATING HISTORY Fixed Deposit Short-Term No rating changes in the last three years Rating Watch/Outlook Strengths Leading market position and strong track record in housing finance Robust asset quality Well diversified and stable resource base Healthy capitalisation and profitability Weakness Strong competition from banks in housing finance segment Rating sensitivity factors Any significant change in market position Weakening in asset quality or profitability Performance and capital requirements of financial services businesses in HDFC Group RATINGS CRISIL AAA/Stable (Assigned) CRISIL AAA/Stable (Reaffirmed) CRISIL AAA/Stable (Reaffirmed) CRISIL AAA/Stable (Reaffirmed) CRISIL A1+ (Reaffirmed) FAAA/Stable (Reaffirmed) Analytical Contacts at CRISIL: Pawan Agrawal Tel: Rajat Bahl Tel: Customer Service Helpdesk Timings: 10:00 am to 7:00 pm Toll free number: Disclaimer: CRISIL has taken due care and caution in compilation of data for this rating rationale, based upon the information provided by the issuer and also upon information obtained from sources it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information. CRISIL especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of the rating or the rationale. No part of this rationale may be published / reproduced in any form without CRISIL's prior written approval. A CRISIL rating reflects CRISIL's current opinion on the likelihood of timely payment of the obligations under the rated instrument and does not constitute an audit of the rated entity by CRISIL. A CRISIL rating is not a recommendation to buy, sell or hold the rated instrument; it does not comment on the market price or suitability for a particular investor. All CRISIL ratings are under surveillance. Ratings are revised as and when circumstances so warrant. CRISIL Ratings rating criteria are generally available without charge to the public on the CRISIL public web site, For the latest rating information on any instrument of any company rated by CRISIL, please contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (+91 22) CRISIL Complexity Levels are assigned to various types of financial instruments. The CRISIL Complexity Levels are available on Investors are advised to refer to the CRISIL Complexity Levels for instruments that they propose to invest in. Investors can also call the Customer Service Helpdesk with queries on specific instruments.

2 2 Outlook: Stable CRISIL believes that Housing Development Finance Corporation Ltd (HDFC) will maintain a robust credit risk profile over the medium term on the back of its strong asset quality, and healthy capitalisation and profitability. CRISIL also believes that HDFC s strong franchise and fundamentals will enable the company to maintain its competitive position, supporting its current ratings. The outlook may be revised to Negative if HDFC s asset quality or profitability weakens significantly. Rationale HDFC, a housing finance company, was incorporated in 1977; its initial shareholders included the International Finance Corporation, Washington, and the Aga Khan Trust. As on March 31, 2013, HDFC s total loans stood at Rs billion (outstanding loan book of Rs billion), of which 68 per cent consisted of loans to individuals, while loans to corporate entities, rental discounting, and construction finance accounted for the remainder. For , HDFC reported a profit after tax (PAT) of Rs.48.5 billion (Rs.41.2 billion for the previous year) on a total income (net of interest expense) of Rs.72.6 billion (Rs.62.0 billion). For the half year ended September 30, 2013, HDFC reported a PAT of Rs.24.4 on a total income (net of interest expense) of Rs.37.1, up from Rs.21.5 billion and Rs.32.9 billion respectively for the corresponding period of the previous year. HDFC Group has a significant presence across the entire gamut of financial services. HDFC s presence in the housing finance, life and general insurance, asset management, and banking segments has enabled the company to leverage its brand and provide a wide array of financial services to clients. HDFC holds a 59.3 per cent stake in Gruh Finance Ltd (rated CRISIL AA+/FAAA/Stable/CRISIL A1+ ), an HFC based in Gujarat. HDFC is also present in the insurance sector through HDFC Standard Life Insurance Company Ltd, in which HDFC holds a stake of 72.4 per cent, and through HDFC ERGO General Insurance Company Ltd, in which HDFC holds 73.9 per cent. HDFC also holds a 59.8 per cent stake in HDFC Asset Management Company. HDFC Bank Ltd (HDFC Bank; CRISIL has a rating of CRISIL AAA/Stable on HDFC Bank s Upper Tier-II bonds and Tier-I Perpetual bonds) is an associate entity in which HDFC (along with its wholly owned subsidiaries, HDFC Investments Ltd and HDFC Holdings Ltd) holds an equity stake of 22.7 per cent. HDFC also has a stake of 62.3 per cent (89.4 per cent on a fully diluted basis) in Credila Financial Services (rated CCR AA+/CRISIL A1+ by CRISIL), a company offering education loans. The ratings on HDFC are primarily driven by its: Leading market position and strong track record in housing finance HDFC has a track record of more than 35 years of profitable growth in the individual and corporate housing finance segments. HDFC has maintained its position as one of the top players in the housing finance business in India, with outstanding loans registering a compound annual growth rate (CAGR) of 20.2 per cent (excluding loans sold) over the past five years. In (refers to financial year, April 1 to March 31), HDFC disbursed Rs billion a growth of 16 per cent over the previous year. Loan approvals grew by 15 per cent in As on March 31, 2013, 68 per cent of the total loan portfolio consisted of housing loans to individuals. While competition has increased over time with banks becoming more focused on this segment, and pricing in the industry becoming more aggressive, HDFC has maintained its market share. As per CRISIL s estimate estimates, HDFC had a market share of around 15 per cent as on March 31, 2013.

3 3 HDFC is a significant player in the non-individual segment as well; as on March 31, 2013, 32 per cent of the portfolio (30 per cent as September 30, 2013) consisted of loans to corporates, developer financing, and lease rental discounting. HDFC is the largest organised player in this segment and has a long history of assessing credit risks and financing such projects. Given its experience in this segment, HDFC will continue to benefit from the real estate financing needs of fast-growing sectors such as information technology, business process outsourcing, and corporate parks. CRISIL believes that HDFC, with its strong brand equity and customer service orientation, will maintain its strong market position in the housing finance segment, despite intense competition from commercial banks in the residential mortgage space. Robust asset quality HDFC has robust asset quality, backed by strong risk management systems and efficient credit approval mechanisms. As on March 31, 2013, the company s gross non-performing loans (NPLs) accounted for 0.70 per cent of its loan portfolio, down from 0.74 per cent for the previous year. As on September 30, 2013, gross NPLs were 0.79 per cent of the portfolio. Since inception in 1977, HDFC has had net write-offs of Rs.1.5 billion, which is negligible, at 4 basis points (bps; 100 basis points equal 1 percentage point) of its cumulative disbursements till March 31, HDFC s individual housing loan portfolio, which accounted for 68 per cent of its total loans as on March 31, 2013, (70 per cent as on September 30, 2013) has consistently displayed good asset quality. The company reported NPLs of 0.58 per cent in the individual housing loan segment as on March 31, 2013 (0.59 per cent as on September 30, 2013). The NPLs in the non-individual portfolio are higher, at 0.91 per cent as on March 31, 2013; this has increased to 1.19 per cent as on September 30, This portfolio is relatively chunky and is vulnerable to stress in the current economic environment. HDFC manages risk in this segment through a rigorous appraisal process. In the developer segment, HDFC funds mainly residential projects where the demand is relatively stable. Asset quality is managed through customer selection based on past experience, linking disbursements to construction schedules, cross linking of collateral (which, in around 95 per cent of cases, is pledged only to HDFC) in large cases, as well as additional security in the form of personal guarantees, liquid investments, and project equity. The proportion of unsecured loans in the portfolio is low; unsecured loans are given only to companies with a strong credit profile. Hence, CRISIL believes that the likelihood of losses on these loans is limited despite the vulnerability of these exposures in a difficult economic environment. CRISIL believes that HDFC s strong expertise in appraising risks in the real estate sector, and stringent monitoring, will help it address credit risks in the corporate and the builder segment. HDFC s asset quality in the housing loan segment is likely to remain robust, given its conservative loan-to-value (LTV) ratios and underwriting norms. Well-diversified and stable resource base HDFC has a well-diversified and stable resource base, comprising fixed deposits, bank borrowings, debentures, bonds, and foreign currency borrowings. This lends flexibility to the company s borrowings, allowing it to manage borrowing costs. Given the high base rates of banks, resulting in relatively higher costs of bank borrowings, HDFC focused on market borrowings and fixed deposits in The share of domestic term loans consequently further reduced to 11 per cent as on March 31, 2013 from 28 per cent as on March 31, 2012 while the share

4 4 of market borrowings has increased to 56 per cent from 45 per cent over the same period. However, with the tight liquidity situation in the second quarter of and sharp increase in cost of market borrowings, incremental funding has been primarily through bank loans and the share of term loans increased to 19 per cent as on September 30, HDFC also has a substantial fixed deposit base; these provide stability to the company s resource profile. Deposits constituted 33 per cent of overall borrowings as on March 31, 2013 as compared to 26 per cent as on March 31, This remained steady as on September 30, HDFC s cost of borrowings increased to 9.7 per cent (on a yearly average basis) in from 9.3 per cent in This is in line with industry trends. HDFC s strong resource-raising capabilities, high fixed deposit renewals, and the high proportion of floating rate home loans in its portfolio mitigate the inherent tenure mismatch and interest rate risks in the housing finance business. Healthy capitalisation and profitability HDFC s financial risk profile remains sound, marked by good capitalisation and profitability. As on March 31, 2013, HDFC had an overall capital adequacy ratio (CAR) of 16.4 per cent and a Tier-I CAR of 13.9 per cent (19.0 per cent and 16.5 per cent respectively as on September 30, 2013). HDFC s net worth increased to Rs billion as on March 31, 2013 from Rs billion a year ago; Rs.32.9 billion was realised on conversion of warrants into equity shares in August HDFC and its wholly owned subsidiaries, HDFC Investments Ltd and HDFC Holdings Ltd, currently hold 22.7 per cent stake in HDFC Bank. HDFC s capital position remains comfortable even when adjusted for such strategic investments; reducing the investment in HDFC Bank from Tier-I capital would result in a Tier-I CAR of 13.5 per cent as on September 30, CRISIL believes that HDFC s capitalisation will remain healthy over the medium term, given the company s strong internal accruals. HDFC s consistently robust asset quality is also expected to support its capitalisation. HDFC s earnings profile is marked by healthy interest spreads, low expense levels, and good return on net worth (RoNW). The company reported a steady interest spread of 2.15 to 2.35 per cent (2.3 per cent in ) on loans over cost of borrowings over the past four years. The company earned an adequate net profitability margin 1 (NPM) of 1.6 per cent (pre-credit costs) in HDFC s profit after tax (PAT) of Rs.48.5 billion in translated into a RoNW of 22.0 per cent. CRISIL believes that HDFC will maintain a stable, above-average earnings profile over the medium term. The above-mentioned strengths are partially offset by HDFC s following weakness: Strong competition from banks in housing finance segment HFCs continue to face significant competition from banks in the retail home loan business. HDFC was the market leader in the home loan segment till However, over the past few years, large banks such as ICICI Bank and the State Bank of India have ramped up their residential home loan portfolios significantly. 1 NPM is defined as yield on average funds deployed less cost of borrowings and operating expenses plus core fee-based income. Yield on funds deployed includes loans and advances, investments and cash and bank balances. Cost of borrowings includes the premium on zero coupon debentures

5 Rs. Billion 5 Nevertheless, HDFC remains among the top three financiers of housing loans in the country in terms of disbursements. Among HFCs, HDFC and LIC Housing Finance Ltd (LIC HF) together have a market share of around 50 per cent in the individual loan segment. While banks have increased their focus on housing finance given the current slowdown in demand in the corporate segment, CRISIL believes that HFCs would continue to benefit from their niche focus and gain market share over banks. However, aggressive competition between banks and HFCs may lead to a weakening of underwriting norms and impact asset quality in this segment. Business Profile Market position HDFC has a network of 348 outlets (including 94 offices of subsidiary distribution company) covering over 2400 towns and cities as on September 30, Individual housing loans constituted 68 per cent of HDFC s assets under management (including securitised portfolio) as on March 31, 2013 (70 per cent as on September 30, 2013). As on September 30, 2013, lease rental discount constituted 6 per cent of the portfolio, while corporate loans and construction finance constituted 12 per cent each. Retail loans against property and promoter funding currently constitute less than 5 per cent of the portfolio. HDFC s primary sourcing partner is its subsidiary, HDFC Sales Pvt Ltd, which accounts for 46 per cent of its origination. In addition, HDFC Bank sources housing loans for HDFC for a fee: in , 28 per cent of HDFC s individual loans disbursed were sourced through HDFC Bank. HDFC retains control over credit, legal, and technical appraisals of all loans, as per its agreement with HDFC Bank. HDFC can sell back loans to HDFC Bank under the mortgage-backed securities and loan assignment route. In , HDFC sold Rs billion of individual loans to HDFC Bank under the assignment route. Both companies benefit from this arrangement. While HDFC earns a fee income from HDFC Bank for administering and servicing loans, HDFC Bank obtains high-quality assets based on HDFC s proven evaluation capabilities. The prepayment rate has ranged between 12 and 14 per cent over the past 3 years. Chart 1: Trends in approvals and disbursements For the year ended March 31 Approvals Disbursements

6 Rs Billion Rs. Billion 6 % Chart 2: Cumulative approvals and disbursements 6,000 5,000 4,000 3,000 2,000 1, , , , , , , For the year ended March 31, Approvals (Cumulative) Disbursements (Cumulative) Asset quality HDFC s gross NPLs stood at 0.70 per cent as on March 31, 2013 (0.79 per cent as on September 30, 2013). Gross NPA levels in the individual portfolio remained steady between March 31, 2013 and September 30, 2013 at around 0.58 per cent, while those in the non-individual period have increased over this period. HDFC wrote off loans aggregating Rs million in HDFC has, since inception, written off loans (net of subsequent recoveries) of Rs.1.5 billion, constituting less than 4 bps of cumulative disbursements since inception. As on September 30, 2013, the average ticket size of HDFC s loans was Rs.2.18 million, with an average loan-to-value ratio of 65 per cent (at origination) and average loan tenure of 13 years. Chart 3: Trend in Asset Quality Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Gross NPA Gross NPA (%) Resources Total borrowings aggregated Rs billion as on March 31, 2013 (Rs billion as on September 30, 2013).

7 7 The company has healthy relations with more than 30 banks, and has access to funding from mutual funds and insurance companies. HDFC had foreign currency borrowings equivalent to USD633.0 million as on March 31, 2013; the entire principal has been hedged. The company has also entered into cross-currency swaps for a notional amount of USD476.5 million to convert its rupee liabilities into foreign liabilities. The total net foreign currency exposure on cross-currency swaps is USD million. The open position is at 0.76 per cent of the total borrowings. Chart 4: Resource Mix as on March 31, 2013 Bonds & Debentures 56% Deposits 33% Domestic Term Loan 11% Financial Profile Capital adequacy HDFC reported a healthy Tier-I and overall CAR of 13.9 per cent and 16.4 per cent respectively of its risk-weighted assets as on March 31, In August 2013, NHB revised the risk weights on some segments of individual home loans and also reduced the risk weights on commercial real estate (residential housing). Consequently, HDFC s Tier-I and overall CAR have increased to 16.5 per cent and 19 per cent respectively as on September 30, Adjusting HDFC s Tier-I capital for the investment in HDFC Bank will result in an adjusted Tier-I ratio of 13.5 per cent. HDFC s gearing, at 7.3 times as on March 31, 2012, is comparable to that of its peers.

8 Rs. Billion 8 % Chart 5: Trend in capitalisation Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 - Net worth Tier I Capital Earnings For the year ended March 31, 2013, HDFC reported an adequate NPM of 1.6 per cent. HDFC s core fee-based income has traditionally been low as it primarily comprises processing fees. The company earned a comfortable return on managed assets (RoMA) of 2.5 per cent in Table 1: Net Profitability Margin (NPM) Yearly Average Basis Yield/ Average Funds deployed 11.5% 11.0% 9.6% Cost of Borrowing 9.7% 9.3% 7.6% Gross Spread 1.7% 1.7% 2.0% Fee Income/Average Funds Deployed 0.3% 0.3% 0.3% Operating Exp/Average Funds Deployed 0.4% 0.5% 0.5% Net Profitability Margin (Pre-credit Costs) 1.6% 1.5% 1.9% Liquidity and asset-liability management HDFC s liquidity is well managed. Assets and liabilities were well-matched up to one year bucket as on March 31, As on March 31, 2013, 84 per cent of the company s assets and 71 per cent of its liabilities were on a floating-rate basis. HDFC is exposed to risks related to tenure mismatches and changes in interest rates, which are inherent in the housing finance business. However, its strong resource-raising capabilities, high fixed deposit renewals, and the large proportion of floating-rate home loans in its portfolio mitigate these risks considerably. The company also has currency swap agreements with other banks and financial institutions to protect itself against fluctuations in forex rates on the liabilities side.

9 9 Key Financials As on / For the year ended Disbursements Rs. Billion Income from operations Rs. Billion Reported PAT Rs. Billion Equity Capital Rs. Billion Reported Net Worth Rs. Billion Loans outstanding* Rs. Billion Total Borrowings Rs. Billion Investments (Net) Rs. Billion Total Assets Rs. Billion Total Assets (incl. managed assets)^ Rs. Billion PAT/Average Total Assets % PAT/Average Total Assets (incl. managed assets) % PAT/ Average Net Worth % Gross NPA Ratio % Tier I capital Adequacy % Total debt/net worth Times * Includes debentures and corporate deposits for funding real estate projects. ^ Includes securitised portfolio

10 10 Brief financial results As on / For the half year ended September Loans Outstanding Rs. Billion Income from operations Rs. Billion Total Income Rs. Billion Interest Expense Rs. Billion Total Expenditure Rs. Billion Reported PBT Rs. Billion Reported PAT Rs. Billion Gross NPA Ratio % Tier I capital Adequacy % CRISIL Limited CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai Tel: + 91 (22) Fax: + 91 (22) CRISIL rating actions are updated online on