>HDFC (CLSA)

PROFITABLE GROWTH

CLSA organised investors meetings in USA with the senior management team of HDFC (Deepak Parekh, Chairman; Keki Mistry, Vice Chairman and CEO and Ms Renu Karnad, MD). Our interaction with the management backs our view that competitive environment has improved in recent months as PSU banks are facing difficulties in delivering on turnaround time. Our interesting notes from management were:

• PSU banks facing backlog: The demand for mortgages has been very strong and supported by cut in interest rates and real estate prices. While aggressive cut in rates helped PSU banks to gain market share in 2009, they are now facing significant backlog of applications that has increased their turnaround time to 3-4 weeks compared to that of 10 days for HDFC.

• HDFC to gain market share as teaser rates are withdrawn: Management believes that most banks have either withdrawn or will shortly withdraw teaser rate schemes. This will help HDFC to gain market share, especially due to its better service standards and faster turnaround time.

• Teaser rates were spread accretive: Management highlighted that its limited offering of fixed rate mortgage loans (8.25% fixed for 2 years) generated higher spreads, in spite of lower yields. The scheme was funded by low cost borrowings leading to spread of ~2.4% compared to overall spreads of 2.25% in 3QFY10.

• Loan growth at +20%; RoE will improve 1% every year: Management reiterated its target of 20% annualised loan growth over the next 3-5 years, as its benefits from a growing market. Focus on asset quality and cost controls will help HDFC in improving RoE by 100bps annually.

• Subsidiaries scaling-up well: Management expects 175% YoY growth in general insurance and believes that profitability of life insurance business is ‘comfortably’ in line with analysts’ expectations.

• Value unlocking likely: Management expects that listing of HDFC Standard Life in next 12 months and transfer of strategic stakes in non subsidiaries and associate companies to a separate company will help HDFC group in unlocking value from investments made over the past 8-10 years

• New business initiatives: HDFC may deploy the funds raised through listing of life insurance business either to fund the foray into the education business and financing of education loans or increase dividend payouts.

To read the full report: HDFC