CRISIL Ratings has assigned its 'CRISIL AAA/Stable' rating to the Rs 75,000 crore non-convertible debentures (NCDs) of Housing Development Finance Corporation Limited (HDFC). The ratings on the other debt instruments and fixed deposits have been reaffirmed at 'CRISIL AAA/Stable/CRISIL A1+. CRISIL Ratings has also withdrawn its rating on Rs 17,385 crore NCDs and Rs 4.2 crore (refer annexure detail of rating withdrawn table) bonds given redemption of the same. CRISIL Ratings has received confirmation of redemption from the trustee. The same is in line with the withdrawal policy of CRISIL Ratings.

 

CRISIL Ratings has taken note of the composite scheme of amalgamation of HDFC into HDFC Bank Ltd (HDFC Bank), as announced by both the companies on April 4, 2022. The scheme has received, so far, ‘no objection’ from stock exchanges (BSE & NSE), Pension Fund Regulatory and Development Authority (PFRDA), Reserve Bank of India (RBI) and approval from the Competition Commission of India (CCI) and now awaits various other regulatory, creditors and shareholders’ approval. CRISIL Ratings will continue to monitor the progress on the announced amalgamation.

 

The ratings continue to factor in the leading market position and sound track record of HDFC in the housing finance business, its healthy asset quality, diversified and stable resource profile and a strong financial risk profile. These strengths are partially offset by exposure to intense competition in the housing finance segment.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of HDFC and its subsidiaries and associates. CRISIL Ratings expects that managerial and financial support will be extended to these subsidiaries, given their strategic importance, majority shareholding and shared brand.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strong market position:

As the largest housing finance company in India, HDFC has been recording profitable growth over the past 45 years in the individual housing and corporate segments. Though entry of new players and greater focus by banks on this segment have intensified competition, HDFC has maintained its market share. As on September 30, 2022, its loan book stood at Rs 5,95,269 crore, a growth of 14% over the previous fiscal (Rs 5,20,798 crore as on September 30, 2021; Rs 5,68,363 crore as on March 31, 2022). Assets under management (AUM; including loans sold) stood at Rs 6,90,285 crore (Rs 5,97,339 crore as on September 30, 2021; Rs 6,53,902 crore as on March 31, 2022). The company also has a sizeable presence in other financial services, including life insurance, general insurance, AMC and education financing, through subsidiaries.

 

Healthy asset quality:

Overall asset quality remains healthy with gross stage 3 assets[1] (GS3) as on September 30, 2022 at 1.91% vis- a-vis 2.50% as on September 30, 2021 (2.27% as on March 31, 2022 and 2.34% as on March 31, 2021). In the Q1FY22, uptick in asset quality metrics was primarily due to delinquencies in the individual portfolio on account of second wave of pandemic with GS3 in individual portfolio increasing to 1.55% as on June 30, 2021, from 1.15% as on March 31, 2021. Nevertheless, it has improved, thereafter, on sequential basis, and remains comfortable as reflected in GS3 of 1.05% as on September 30, 2022. The extent of one-time debt restructuring under the Covid-19 relief scheme has also been limited with total book restructured at 0.7% of the loan book as on September 30, 2022.

 

In the non-individual portfolio, GS3 stood at 5.0% as on September 30, 2022 (5.79% as on March 31, 2022). With a sizeable exposure to the real estate sector and sensitivity of such sectors to the prolonged challenging environment, performance of such loans will remain a monitorable. Any continued or substantial increase in delinquencies in the individual portfolio will also be monitored closely.

 

Diversified and stable resource profile:

The well-diversified resource profile lends flexibility to borrowings. The borrowing mix primarily comprises market borrowings (42% of total borrowings as on September 30, 2022) and fixed deposits (31%). Term loans (including external commercial borrowings [ECBs]) accounted for 27% of total borrowings as on September 30, 2022. Strong resource-raising capabilities, high fixed deposit renewals, and a substantial proportion of floating rate home loans in the portfolio mitigate the inherent tenure mismatch and interest rate risk in the housing finance business.

 

Strong financial risk profile:

Financial risk profile remains sound on the back of healthy capitalisation and earnings profile. As on September 30, 2022, HDFC (standalone) had an overall capital adequacy ratio (CAR) of 22.5% and Tier-I CAR of 21.9%. Networth and adjusted gearing stood at Rs 1,23,441 crore and 5.1 times, respectively. The company also has an established track record of raising capital; the most recent round was in August 2020, wherein the company had raised Rs 10,307 crore through a combination of qualified institutional placement and NCDs (with warrants).

 

Earnings profile is marked by comfortable interest spreads, low expense levels and high returns on networth. Spread on loans has been range-bound at 2.15-2.35% over the past five years (2.28% for the half year ended September 30, 2022; 2.29% for fiscal 2022). Return on assets (RoA) stood at 2.27% for fiscal 2022. For the half year ended September 30, 2022, RoA (annualised) was 2.46%.

 

Weakness:

Exposure to intense competition in the housing finance industry:

HDFC faces intense competition in the retail mortgage loan segment, especially from banks. Lately, with weak corporate loan demand, banks have become aggressive in the retail mortgage space.

[1] GS3 numbers reported as on March 31, 2022 and September 30, 2022 incorporate the impact of RBI’s circular on prudential norms on Income Recognition, Asset Classification & Provisioning (IRACP norms), hence are not comparable to corresponding numbers of previous fiscal

Liquidity : Superior

Given the longer tenure on the asset side, the asset-liability maturity profile as on March 31, 2022 had mismatches in a few buckets. As on September 30, 2022, debt repayments (assuming no CP rollovers) for the next three months were Rs 51,187 crore (of which Rs 19,415 crore is towards CPs). Against this, liquidity of around Rs 42,832 crore was available via bank balances, liquid fund schemes of mutual funds, deposits with banks, and investments in government securities. Further cushion is provided by refinancing available from National Housing Bank (NHB), flexibility to securitise loan assets and the adequate flow of monthly collections. Unaccounted gains of listed equity, including the Corporation's subsidiary and associate companies, stood at Rs 2.46 lakh crore as on September 30, 2022.

 

ESG profile

CRISIL Ratings believes that HDFC’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

HDFC has an ongoing focus on strengthening various aspects of its ESG profile. Some of the key highlights are:

 

• During FY22, the company has financed Rs 27,889 crore of individual home loans, where properties are certified as green building projects. In FY22, the company launched Green and Sustainable Deposits for retail depositors, wherein funds are on-lent towards green housing and other sustainable lending initiatives.
• HDFC has taken initiatives to deepen its footprint in supporting and financing energy efficient and smart green homes and buildings.
• The company uses solar energy in certain owned offices. In FY22, the company has reduced its emission by 108.12 MTCO2e as a result of usage of solar panels. Further, it has deployed a country level e-waste management system through authorized recyclers.
• Share of women workforce was maintained at 26% (in permanent employees) in 2022 as well, higher when compared to certain peers. HDFC plans to increase the percentage of women employees by at least another 2% within the medium-term.
• 50% of the board members are independent directors, with segregation in chairman and executive positions. HDFC also has Risk Management Committee which consists of majority of directors and chaired by an Independent Director, also the disclosures put out by it are extensive.

There is growing importance of ESG among investors and lenders. HDFC’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the substantial shareholding by foreign portfolio investors, high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook Stable

HDFC should maintain its robust credit risk profile over the medium term, backed by healthy asset quality and a strong financial risk profile. Strong franchise and fundamentals should enable the company to maintain its competitive position, thereby supporting current ratings.

Rating Sensitivity factors

Downward factors

•   Deterioration in asset quality with GS3 ratio of over 3% on a steady-state basis, thereby impacting profitability
•   Weakening of capital structure with a significant increase in gearing

About the Company

HDFC, a housing finance company, was incorporated in 1977; its initial shareholders included International Finance Corporation, Washington, and the Aga Khan Trust. As on September 30, 2022, AUM stood at Rs 6,90,285 crore of which 81% consisted of loans to individuals. Loans to corporate entities, lease rental discounting, and construction finance accounted for 4%, 6% and 9%, respectively.

 

The company also has a strong presence in the life insurance, general insurance, asset management and education financing businesses through its subsidiaries - HDFC Life Insurance Company, HDFC Ergo, HDFC AMC and HDFC Credila, respectively.

 

For fiscal 2022, HDFC, on a standalone basis, reported a profit after tax (PAT) of Rs 13,742 crore and total income (net of interest expense) of Rs 21,251 crore, against PAT and total income (net of interest expense) of Rs 12,027 crore and Rs 19,561 crore, respectively, for the previous fiscal.

 

For the half year ended September 30, 2022, reported PAT on a standalone basis stood at Rs 8,123 crore (including profit on sale of investment of Rs 184 crore) on total income (net of interest expense) of Rs 12,169 crore as against Rs 6,781 crore (including profit on sale of investment of Rs 258 crore) and Rs 10,794 crore, respectively, for the corresponding period previous fiscal.

 

For fiscal 2022, on a consolidated basis, HDFC reported a PAT of Rs 24,042 crore and a total income (net of interest expense) of Rs 1,08,738 crore, against Rs 20,488 crore and Rs 1,09,990 crore, respectively, for the previous fiscal. For the half year ended September 30, 2022, reported PAT on a consolidated basis stood at Rs 12,617 crore and total income (net of interest expense) was Rs 50,671 crore, against Rs 10,981 crore and Rs 56,290 crore, respectively, for the corresponding period previous fiscal.

Any other information: Not applicable

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
HDFC Asset Management Company Limited	Full	Subsidiary
HDFC Life Insurance Company Limited	Full*	Associate
HDFC ERGO General Insurance Company Limited	Full*	Associate
HDFC Credila Financial Services Limited	Full	Subsidiary
HDFC Holdings Limited	Full	Subsidiary
HDFC Investments Limited	Full	Subsidiary
HDFC Trustee Company Limited	Full	Subsidiary
HDFC Sales Private Limited	Full	Subsidiary
HDFC Venture Capital Limited	Full	Subsidiary
HDFC Property Ventures Limited	Full	Subsidiary
HDFC Ventures Trustee Company Limited	Full	Subsidiary
HDFC Pension Management Company Limited	Full	Subsidiary
HDFC Capital Advisors Limited	Full	Subsidiary
HDFC Education and Development Services Private Ltd	Full	Subsidiary
HDFC International Life and RE Company Limited	Full	Subsidiary
HDFC Investment Trust	Full	Subsidiary
HDFC Investment Trust-II	Full	Subsidiary
Griha Investments	Full	Subsidiary
Griha Pte Limited	Full	Subsidiary
HDFC Bank Limited	Proportionate	Associate
True North Ventures Pvt Ltd	Proportionate	Associate

* Considered as full as per Ind-As accounting