HDFC (HDFC)
Banks/Financial Institutions
Rising home loan rates will temper loan growth. HDFC has raised home loan rates
for existing customers by 75 bps with effect from December 1, 2010. HDFC has
withdrawn the dual rate home loan scheme and now offers new home loans at 9.5%
as against 8.75-9% earlier. The management expects margins to remain stable post the
current hike. We believe that the rise in real estate prices coupled with rise in lending
rates will likely affect loan growth in the retail lending business. Valuations remain rich,
retain REDUCE.
HDFC has increased home loan rates, others to follow suit
HDFC has increased its PLR by 75 bps with effect from December 2010. This hike follows a 50 bps
rise in PLR in September 2010. Home loan rates for new customers have also been increased to
9.5% for loans up to Rs3 mn, 9.75% for loans between Rs3 mn and Rs7.5 mn, and 10% for loans
above Rs7.5 mn. HDFC and ICICI Bank have withdrawn their dual rate (teaser) home loan schemes
following sharp rise in interest rates. In the recent credit policy review, RBI has increased standard
asset provisions for dual rate loans offered by banks to 2% from 0.4% earlier.
Over the weekend, ICICI Bank has also increased their home loan rates by 50 bps. SBI will review
the rates in January 2011; however, most other banks are currently reviewing their home loan
rates and will likely announce rate hikes over the next few weeks.
Borrowings cost has increased, hike will support margins
The bulk borrowings rates have increased by about 100-300 bps over the last two quarters. CP
rates have now increased to about 9.5% due to the liquidity crunch. Last week, liquidity in the
system was at a peak deficit of about Rs800 bn. We believe that the rise in bulk borrowings rates
in the system will prompt the bank to hike lending rates. Banks with high CASA—HDFC Bank,
PNB, BoB and Union Bank—will likely be better-placed in the current environment. HDFC’s
management has highlighted that the company will be able to maintain margins post the current
hike. The entire portfolio will be re-priced within next three months.
SOTP-based target price of Rs720; retain REDUCE
We retain SOTP-based target price of Rs720. In our fair value estimate, we value HDFC’s
mortgage business at Rs400/share—6X core PBR and 19X core PER FY2012E. In order to
capture the impact of the likely warrant conversion in FY2013E, we have valued the business
using a residual growth model as of March 2013E and discounted back the value to March
2011E at 12.5%. At our fair value estimate, the mortgage business will trade at 4X core PBR
and 15X core PER FY2013E for RoEs of about 26-30% (2% core RoA and leverage of 13-
15X).
