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HDFC Q3 Results: Profit Rises 3.96 Times, Aided By Gruh Finance-Bandhan Bank Merger

HDFC got a profit boost from a fair value gain due to the merger of its arm Gruh Finance and Bandhan Bank.

Information leaflets are displayed at a Housing Development Finance Corp. (HDFC) bank branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Information leaflets are displayed at a Housing Development Finance Corp. (HDFC) bank branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Housing Development Finance Corporation Ltd.’s quarterly profit beat analysts’ estimates aided by a one-timefair value gain resulting from the merger of its arm, Gruh Finance Ltd., with Bandhan Bank Ltd.

Profit rose 3.96 times year-on-year to Rs 8,372.49 crore in quarter ended December 2019. The reported profit was higher than the Rs 5,855 crore estimated by analysts tracked by Bloomberg.

Core net interest income, excluding rental fee and other income, rose 13.6 percent over the previous year to Rs 2,957.8 crore. HDFC’s loan book grew 13 percent on an annual basis.

Net interest margin for the nine-month period ended December 2019 widened to 3.3 percent from 3.08 percent over last year.

Why The Profit Boost?

During the quarter, HDFC accounted for a fair value gain of Rs 9,020 crore on conversion of its shareholding in Gruh Finance to shareholding in Bandhan Bank. The merger, which closed during the quarter, saw HDFC convert its shareholding in Gruh Finance into shares of Bandhan Bank.

This was done in keeping with the treatment of ‘Investments in Associates and Joint Ventures’ under Ind-AS 28, HDFC said in a press release.

This gain, however, has not been included in calculation of HDFC’s capital adequacy ratio, said Keki Mistry, vice-chairman of HDFC Ltd. The housing financier has also accounted for the deferred tax liability on account of the Gruh Finance-Bandhan Bank transaction, Mistry added.

After accounting for this liability, the post-tax profit for the quarter stands at Rs 8,372 crore in the third quarter of 2019-20 compared to Rs 2,114 crore in the same period last year.

Asset Quality and Real Estate Stress

HDFC’s asset quality weakened marginally.

Bad loans now form 1.36 percent of the total loan portfolio from 1.33 percent in the preceding quarter.

Gross non-performing asset ratio in the individual portfolio stood at 0.75 percent from 0.73 percent in the previous quarter. Gross NPA ratio in the non-individual portfolio stood at 2.91 percent from 2.87 percent.

Financing for a vehicle or an industrial project is very different from financing of real estate where the secruity is the real estate itself. So whatever be the condition, real estate will have value. Whilst technically loans can become NPAs or there could be delays in repayments, the risk of major losses in the real estate sector are very limited
Keki Mistry, Vice-Chairman, HDFC Ltd.

Keki Mistry On Funding For Real Estate

But Mistry told BloombergQuint that despite liquidity in the financial system improving over the past few months, the availability for “last-mile financing for real estate projects that are incomplete hasn’t improved”. “There are a number of projects which still have equity value and are cash flow positive, which makes it possible for a new lender to provide last-mile funding to complete the project,” he said. “But the problem today is regulatory.”

Reserve Bank of India regulations don’t allow lenders to provide fresh funding to a project that’s in default or NPA to another lender no matter what safeguards or security they may take, which is why projects remain stuck, he said.

“One way to progress on this is through the real estate fund that the government has created, where we have also made a contribution. Money can be provided to these projects through this fund, but the problem is that there are thousands of stuck projects so it will take a long time,” he said.

A faster solution, however, would be if the RBI permits a one-time restructuring of loans which would help stuck projects get funding, Mistry said.

WATCH | HDFC CEO Keki Mistry speak on real estate and more.