Housing Development Finance Corp. (HDFC), the world’s biggest independent mortgage lender by value, said it will refrain from matching interest rate reductions by banks in India to protect margins that are at a 12-year high.
The Mumbai-based lender may keep rates at 10.25 percent for credit of less than 3 million rupees ($56,800), Keki Mistry, chief executive officer of the company known as HDFC, said in an interview. The lender reduced interest rates by quarter point on Oct. 1. State Bank of India, the nation’s largest lender, is offering home loans at 10 percent.
A slowdown in demand for credit to build factories and roads in Asia’s third-largest economy is prompting banks to switch focus to mortgages, intensifying competition with HDFC and LIC Housing Finance Ltd. (LICHF) State Bank has seen home loan applications double after it cut borrowing costs in a nation that has the fastest pace of inflation among BRIC countries, according to Managing Director A. Krishna Kumar.
“Our rates are a function of our cost of funds and we will bring it down when our cost of funds comes down,” Mistry, 57, said. “Some banks focus on the mortgage business for some time and then shift focus to other banking products. This is our core business and we are here to stay.”
HDFC has gained 17 percent this year, giving it a market value of 1.17 trillion rupees ($22 billion). The shares rose 1.2 percent to 761.65 rupees in Mumbai, their biggest gain in two weeks.
Fannie Mae (FNMA), the biggest mortgage company in the U.S., had a market value of $1.57 billion. Total loans at the lender dropped by 0.075 percent to $2.99 trillion, while they grew 7.7 percent to $29 billion at HDFC.
Mistry forecasts loan growth will expand as much as 20 percent for the next few years as India is an “underpenetrated” mortgage market. Bank credit may grow 17 percent in the year ending March 31 from 19.4 percent a year earlier, according to the Reserve Bank of India.
“If HDFC has to maintain the growth at current levels, they cannot charge a significant premium over State Bank of India (SBIN),” said Pankaj Agarwal, an analyst with Ambit Capital Pvt., who recommends investors sell the stock. “Banks have just started focusing on retail loans and their market share and growth rate will be higher.”
State Bank has a 16 percent share in the home loan market, while HDFC follows with 15 percent, Barclays Plc’s Mumbai-based analysts led by Anish Tawakley said in an Aug. 9 note to clients. ICICI Bank Ltd. (ICICIBC) and LIC Housing control 9 percent each, according to Tawakley.
Banks, which are now focusing on mortgages, will “muddy the waters,” LIC Housing’s Chief Executive Officer V.K. Sharma said in an interview last month.
Access to cheaper funds is helping banks win customers. Banks pay as little as 4 percent on their savings deposits, while finance companies such as HDFC borrow at about 9 percent, said Nitin Kumar, an analyst with Quant Broking Pvt. in Mumbai.
“We have raised funds through bonds this year as the term loans were costlier,” Mistry said. A ruling to allow debt mutual funds to invest 10 percent of their assets in housing finance companies will increase availability of funds, he said.
HDFC, which has 318 offices across India, has sold 177 billion rupees of bonds this year, making it India’s third- biggest local-currency debt issuer. The company’s domestic debt is rated AAA by Standard & Poor’s Indian unit.
The mortgage company, founded by Hasmukh Thakordas Parekh in 1977, reported a net interest margin of 4.03 percent in the year ended March 31, the highest since 2000. The measure was 3.85 percent at State Bank and 2.47 percent at ICICI Bank.
Bad loans at the lender have declined for 30 straight quarters and may fall further, according to Mistry. The company is scheduled to report its second-quarter earnings on Oct. 22.
Mortgage loans accounted for 59 percent of HDFC’s revenue in the year ended March 31, while the life insurance business was 34 percent of the total.
Loans to homebuyers contributed 67 percent of total credit as of June 30, HDFC said. Borrowings by companies made up 13 percent, while an equal percentage was lent to developers for financing construction, according to a company filing.
A slowing economy may prompt India’s central bank to cut its benchmark rate, helping reduce bad loans as well as HDFC’s cost of funds. The Reserve Bank may lower the repurchase rate to 7.5 percent from 8 percent by the fourth quarter, according to the median estimate of 18 economists surveyed by Bloomberg.
Mistry predicts the central bank will cut borrowing costs by as much as 75 basis points by March.
“As the corporate bond rates soften, the mortgage lender will be able to cut the rates if needed,” Quant’s Kumar said. “HDFC has always managed their spreads well and there is no reason to believe that they won’t be able to maintain it now.”
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