Keki Mistry decodes HDFC Ltd’s Q2 results

“HDFC garnered a net profit of Rs 4,454. 24 crore for the quarter ending September 30, 2022 (Q2FY23), rising by 17.8% from Rs 3,780.50 crore in the same period a year ago. Q2 PAT climbed 21.4% against Rs 3,668.82 crore in Q1FY23. “Today the construction finance loan that we would be disbursing typically would have been loans which were given in 2019 or 2020 which was the time when not too many projects were launched,” says Keki Mistry, Vice Chairman & CEO, HDFC

While HDFC’s net interest growth number is a healthy 14%; there was a loan growth of 15-23% in the last five to six quarters and the net interest income is trailing. Walk us through what is happening there.
Let us first understand NII growth, which comes as a result of a change in interest rate. In the first quarter of this year, RBI increased interest rates quite sharply. We in turn increased interest rates to our customers. When RBI increases rates, the change in cost of funds to us is immediate. Our cost of funds go up the same day but the lending rates get increased over a period of three months.

The reason is that with all our old corporate customers it changes every month, but for individual customers, we have always had an agreement that the change in interest rates will come at the end of every three months and that three months is dependent on the month in which they took a loan. So if you have taken a loan in April, then your rate changes will be effective January, April, July, October. If you have taken a loan in February, your rate changes will be effective in February, May, August and November, every three months from the day you took the loan.


Now when rates go up, the impact, the benefit of the higher rates flows through the profit and loss account over three months. So there is roughly an average of one-and-a-half month transmission lag. If you exclude that transmission lag effect, then the growth in the net interest income would have been 16% for this period which is in line with the total AUM growth.

Walk us through your construction finance also. Are you consciously trimming this lending as a piece of your overall mix? Also the least financing seems to be growing slightly lower.
Let us first finish least rental discounting because that is very straightforward. Lease rental discounting has always been between 6% and 7% of our total loan book. It continues to be at 6% and is within the normal parameters.

Lease rental discounting does not grow every quarter because these are large value leases. Large properties sometimes in one quarter you will have a large transaction, another quarter you may not have a transaction, there is no continuity in lease rental discounting products.

Construction finance at one time used to be 14% of our book. Today it has come down from 14% to 9%. That is really where the decline in the non-individual loan book has come in. Now this has primarily happened because of the fact that in the period from 2017 to 2020, the latter part of 2017 up to probably the middle of 2020 was a period of some stress in the real estate sector in cities like Mumbai and Delhi for a variety of reasons.

At that time GST was introduced and it was applicable to under construction properties.People stopped buying under construction properties. The last mile funding that developers needed they could not get and so projects got stalled, sentiments got impacted because of that and because of that, not too many new projects were launched. Post 2020 again, project launches started with strong momentum because the individual loan demand is also strong.

Our construction finance loan, unlike a lease rental discounting loan, does not make the disbursement for the loan upfront. The disbursement is linked to construction. First the developer has to put in his equity while he is constructing, then he has to bring the project up to a certain level and then based on the progress in construction, we disburse money.

So typically, disbursements happen two or three years after the loan was given. So today what we would be disbursing typically would have been loans which were given in 2019 or 2020 which was the time when not too many projects were launched.

Now coming to the individual side, what kind of growth are you seeing over here? Are the recent rate hikes impacting consumer behaviour? If yes, how?
We have not seen any significant change in consumer behaviour so far. Here again and this is based on our experience not on this cycle but the last 20 years, we have seen rates go up and down. Interest rates in India over the last 20 years have been fairly volatile.

There have been periods when rates were very high, periods when rates were low and vice-versa. Normally, when rates go up or down, it has a much bigger impact on short-term loans compared to long-term loans. So take the example of a person taking a loan to buy expensive equipment. The loan would be typically fro 12 months or 15 months or a maximum of 18 months. Now when you are taking a 12- or 15-month loan, you want to borrow money at the time when interest rates are low because in 15 months, the rate environment is not going to change. And if rates are high today, in 15 months, rates are not going to come down.

So you want to borrow when rates are low because then that low rate trend will continue for 15 months and by the end of 15 months your loan is paid back. But a housing loan is a 15-year loan. Nobody gets fixed rate loans in India. They are all floating rates. In a floating rate loan, when rates go up, your cost goes up; when rates come down, your cost comes down and over 15 years, there will be two-three-four cycles where rates will go up and rates will go down.

So from an economic standpoint, frankly it does not make too much difference whether you take a loan at the time when rates are high or rates are low. It is just that sentiments tend to be stronger when rates are low and slightly weaker when rates are higher. Other than that, from an economic standpoint, it makes no difference and most customers understand that. Today the education level amongst people, particularly when they are taking housing loans, is very high.