How provisions helped HDFC survive the second wave

That said, the lender isn’t immune to the pandemic and the effects of the second wave were visible on its balance sheet.

Net profit for the June quarter showed a 1.7% drop from the year-ago period and a 5.6% fall sequentially. Bad loans increased from the riskier non-individual loan portfolio, pushing the overall gross bad loan ratio to 2.2%. But bad loans in the individual book, too, have increased sharply to 1.37%, from below 1% in the year-ago period.

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Moreover, the lender has a restructured loan pile of ₹4,482 crore, of which 62% is one non-individual account. For the lender, developer loans have been a pain point and delinquencies here have risen steadily since the pandemic began last year.

Keki Mistry, chief executive officer of the company, said a further surge in bad loans from the developer book is unlikely. Of course, another potential covid wave may put pressure on the balance sheet.

Notwithstanding the rise in delinquencies, HDFC still shines when compared with peers, such as LIC Housing Finance Ltd, which reported gross bad loan ratio of 5.9%. This is one reason for HDFC to command premium valuations.

Another factor in support of the lender is its high provisioning levels. The lender had ₹13,189 crore as provisions as of June and Mistry said that provisions are nearly three times that of the regulatory requirement.

A sharp improvement in collections in July, too, augurs well for the lender’s asset quality.

While the lender has kept delinquencies under check, it has not been so lucky in loan growth. Loan growth moderated to 8% year-on-year.

Recall that the June quarter of FY21, mostly under a nationwide lockdown to curb the spread of the first wave of the pandemic, had witnessed loan growth deceleration to 11%. It is clear that widespread regional lockdowns due to the second wave this time around hit HDFC’s disbursements. After the highest ever monthly disbursements in March, the months of April and May saw a sharp fall, according to the lender.

To be sure, the March quarter was a blockbuster one for HDFC with the highest ever loans disbursed in March. At that time, a reduction of stamp duty for new home purchases by some state governments had resulted in a sharp rise in home sales. HDFC benefited from this boost.

However, disbursements in July were the third highest historically, a sign that growth is picking up.

The non-individual loan book, which has shrunk since the pandemic, may show an expansion in the current financial year as disbursements here have picked up, the lender said.

“We would expect to end the current year with positive growth,” said Mistry in a post-earnings call.

Mistry said construction finance remains a preferred portfolio to grow as it gives the lender access to potential individual borrowers. These loans have a 10% share in the total book.

While analysts derived comfort from HDFC’s asset quality, the deceleration in growth seems to have caught investor attention.

Shares of HDFC have underperformed the broad market since April.