Clipped from: https://economictimes.indiatimes.com/markets/expert-view/expansion-of-hdfc-margins-unlikely-in-q4-keki-mistry/articleshow/80671035.cmsSECTIONSExpansion of HDFC margins unlikely in Q4: Keki MistryLast Updated: Feb 03, 2021, 06:43 PM ISTSynopsis
There may not be scope for margin expansion from the levels at which they are now because HDFC has already reached a level of excess liquidity that it would normally like to keep.
Irrespective of whether NPLs go up or down a little bit next quarter, the provision level HDFC carries is very comfortable, says Keki Mistry, Vice-Chairman & CEO, HDFC.
Can you tell us what led to better NIMs, strong growth and overall a slight increase in the proforma NPA for HDFC?
I would say two-three things. One is the growth. We did expect a strong growth but frankly the actual growth that we saw was even higher than what we had expected. In individual disbursements, we had 26% growth over the third quarter of last year. So, October to December 2020 was 26% higher than October to December 2019, that was one reason.
The second reason was the surplus liquidity. When Covid breakout started, we told investors that we will keep a significantly higher level of excess liquidity than what we normally do. Against our normal level of around Rs 15,000-17,000 crore, we kept the liquidity level at close to Rs 32,000 crore in the first quarter. In the second quarter, we brought that number down to somewhere in the early 20s and in the third quarter we brought it down to an average of Rs 16,800 crore. The excess liquidity that we were carrying in the first and second quarter, actually depressed the net interest margin and the net interest income because this money was deployed in overnight instruments where naturally the return is going to be very low and that started yielding higher return. Plus the relative cost of borrowing kept coming down and spreads were stable but net interest margins went up a bit.
ET Now: While there has been a beat on the margins, there has been good growth in individual loan books. Can you also shed some light on the performance of non-individual loan books?
eki Mistry: In the early part of the year when we spoke to investors, we said that we would be a little slow in the non-individual business from second quarter onwards. In the first quarter of the financial year, which is April to June, we could not do too much of individual disbursements and therefore as we told investors that we will do a large amount of disbursements to AAA corporates for relatively short terms.
Some of that money would have got repaid during the second and the third quarters which explains the fact that the growth on the non-individual front is a little depressed. As we get more confidence about the market and the developers and as sales have picked up a lot, we will look at stepping that up a little bit but we will continue to be very cautious in the space. But we have a pipeline of some good loans and hopefully some of these loans will get disbursed in the quarter ending March 21.
What has led to the lower gross NPA this time around? Segmentally, where are you seeing more stress?
Covid was a big event. People expected that for the financial sector as a whole, there would be a massive strain or a huge increase in the level of non-performing loans. Fortunately that has not happened. But some inching up of non-performing loans would have happened. In March 2020a gross non-performing loan number was 1.99% and when I look at the proforma number as we speak now, it is 1.91%. So it has not really gone up compared to what it was in March.
If we look at the individual loans, in March 20 it was 95 bps and now it is 98 bps. 3 bps up and down is not a material number. In case of non-individuals, it has come down a little bit from 4.71% in March to about 4.35% in December. But going forward, we would continue to be cautious. We would continue to be mindful and we have been very proactive in terms of making provisions. We have consistently kept making provisions in anticipation or as we saw stress in the system. The total provision we carry as of 31st of December stood at Rs 12,342 crore.
The NHB regulations require that we provide for non-performing loans based on the period of default. By the regulatory norms, the provision we would have needed to carry was Rs 6,579 crore as opposed to Rs 12,342 crore we are carrying. So whether NPLs next quarter go up or down a little bit I do not know, but the provision level we carry is very comfortable.
Based on channel checks, tier-2 and tier-3 cities are contributing a lot and the budget has extended benefits to the affordable housing sector till 31st of March 2022. How do you see growth ahead in the individual loan book and the non-individual loan book in this segment? Which pockets are reporting the highest growth?
Let us first split the two between individuals and non-individuals. Non-individual loan book growth is something which we have to decide, the demand is very much there. We have been cautious for several quarters now and we continue to remain cautious. We have to some extent, intentionally slowed down that growth. At some point of time, we will have the confidence and we will take our foot off the brake and then we can grow much faster on the non-individual front.
On the individual front, it is a combination of several things; one, the interest rates on housing loans are at all-time low. In the last 40 odd years, I have never seen interest rates in India as low as they are at this point of time. Housing loan rates are sub 7% in some instances where the customers are very good and credit score is very good.
Second, various states have done a variety of things to encourage people to buy houses in the expectation that by giving a boost to the housing sector effectively, you give a boost to all the core sectors of the economy. Industries like cement, steel, paint and power will get a boost when housing gets a boost.
For example, Maharashtra has lowered the stamp duty rate from 5% to 2% provided the registration was done before 31st December and then from January to March it comes to 3%. In Maharashtra, we have four major branches. Mumbai is the biggest; Pune, Nasik and Nagpur apart from a number of other offices. Maharashtra branches constituted 26% of our disbursements in the third quarter of last year. When we look at the third quarter of this year, 26% has become 28%. So there has been a faster growth in Maharashtra than in other places. But having said that, even in the other places, the growth has been strong.
Also, the important thing is to recognise that the growth is not only in the lower income segment, it is also in the upper income segment. The average loan amount has gone up to Rs 28.5 lakh in the 9-month period.
Interest rates have bottomed and bond yield has risen to 6.09%. It has grown 90 bps to a five-month high. Post the Budget, how do you see your borrowing costs and do you see more scope for margin expansion from the current levels?
I do not think there will be scope for margin expansion from the levels at which they are at this point of time because we have already reached a level of excess liquidity that we would normally like to keep. We would like to keep a liquidity level at around Rs 15,000- 17,000 crore and the average liquidity level in the third quarter was Rs 16,800 core. We can bring it down a little bit more and if we do so, then it will compensate for the slight increase that we have seen in interest rates. Therefore, expansion of margins going forward in the fourth quarter is unlikely, but I do not see any big impact on margins in any way just because there has been a slight inching up of bonds.
FDI in insurance has been hiked to 74%. While it is positive for the insurance space, will we see a foreign partner like Standard Life hike stake in HDFC Life Insurance? Or will Ergo hike stake in HDFC Ergo General Insurance business now?
It is a question that Standard Life has to answer, but they have gradually reduced their stake from the peak of 35% to below 20%. We have two insurance companies — one is a life insurance company and the other is a general insurance company. The life insurance company is listed, the general insurance company is not yet listed. We will have a meeting with our partners in the general insurance business.
ET Now: What is your view on the Budget? Is it going to lead us to sustainable economic recovery from here and revive capex and create more employment?
Keki Mistry: I think it is a growth-oriented Budget and I am personally quite comfortable with the fact that fiscal deficit is higher than what originally was the target. By 2026, we will get back to the original fiscal deficit target. I am very happy that the finance minister has not resorted to increasing taxes as all kinds of rumours were there in the market about Covid tax being imposed and special taxes for people whose income is above a certain level and things like that.
The best way to spur economic growth in my personal view is by increasing spending. Leaving more money in the hands of people, whether it is middle class or rich people, helps because they will spend money and create demand and that will lead to manufacturers producing more to satisfy their demand and they will have to hire more people and create more jobs and in the process boost economic growth.