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HDFC Bank: Home loans ahoy - Views on News from Equitymaster
 
 
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  • Mar 3, 2003

    HDFC Bank: Home loans ahoy

    Due to lack of safe investment opportunities, weak non-food credit off-take and excess liquidity, banks have shifted their focus to the retail segment. Even in the retail segment, home loans have been their saving grace. This is due to the fact that home loans have been one of the largest growing segments in the retail loans market. HDFC Bank, one of the largest and most profitable private sector banks in the country had chosen to stay away from the home loans segment due to the inherent conflict of interest with its parent HDFC. But now, there are all indications that HDFC Bank is likely to make an entry in the home loans market, albeit in an indirect way. The bank is reportedly in negotiations with parent HDFC in order to work jointly towards its entry into the home loans segment.

    According to what has been reported, the arrangement seems to work like this - HDFC Bank will sell HDFC’s home loans products through it large retail banking net work. HDFC Bank in turn may absorb part of the home loans portfolio that it sells into its own books at mutually acceptable terms. So what are the benefits for HDFC Bank and HDFC? The benefit for HDFC Bank is that it stands to get assets in its books that have higher yields as well as that are relatively less risky. While HDFC gets better reach using HDFC Bank’s network.

    HDFC Bank’s gross advances stand at Rs 100 bn, making it one of the largest private sector banks in the country (though much smaller compared to public sector banks like SBI and BoB). The bank’s retail assets are of the order of Rs 25 bn and now form 27.1% of gross advances in December 2002, as against 16.2% of gross advances as at December 2001, indicating a swift growth of 130% in the above-mentioned period.

    Interestingly, none of the retail loans are home loans or mortgage assets. HDFC Bank’s retail assets as a percentage of total customer assets are inline with those of its peers. In light of the fact that it is not present in home loans (the fastest growing segment), HDFC Bank’s the quantum of retail loan disbursement is commendable. Infact, it is one of the leading players in the auto loans segment. The point we are trying to highlight is the bank’s selling capabilities. If it does cater to the home loan market, the move will provide further stimulus to the bank’s growth.

    Bank Retail assets/ Customer assets
    ICICI Bank 22.0%
    HDFC Bank 19.7%
    IDBI Bank 20.0%

    Customer Assets: Advances and investments in corporate debt etc

    HDFC Bank on its part is going to sell one of the best mortgage services in the industry. HDFC is reputed for the quality, foresightedness and integrity of its management. This has led to the company continuing to outdo its rivals in the housing finance business. The quality of HDFC's loan portfolio is excellent, with non-performing loans at just 0.9% of total loan portfolio. The company advances loans up to 85% of the value of the property and most of its loans are to individuals. It retains the legal rights to the property till the loans are repaid. Thus it has a large margin of safety, as the company can sell off the property and can recover the dues in case the loans go bad. The HDFC brand itself is so strong that HDFC Bank will not find it difficult to sell the service offered by HDFC.

    HDFC on the other hand has the opportunity to sell more home loans, as it will get the strong retail network of HDFC Bank for this purpose. And going by the aggressive nature of HDFC Bank it is very likely that HDFC will benefit immensely from the arrangement. It seems like a win- win situation for both HDFC and HDFC Bank, atleast on first glance. This arrangement may work for the medium term, but as there is increased realisation regarding the benefits of working together, a merger between HDFC and HDFC Bank cannot be ruled out.

     

     

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