Rating Rationale

Strengths
* Strong market position
It is India's largest housing finance company, with profitable growth over the past 40 years in the individual housing and corporate segments. While competition has increased over time, with the entry of new players and greater focus by banks on this segment, HDFC has maintained its market share. As on December 31, 2019, HDFC's loan book stood at Rs 4,41,472 crore, a growth of 13.4% over the previous year. Gross loans i.e. including loans sold, stood at Rs 505,401 crore as on same date (Rs 4,61,913 crore, respectively, as on March 31, 2019). HDFC Ltd also has sizeable presence in other financial services space including life insurance, general insurance, AMC and education financing business, through its subsidiaries.

* Healthy asset quality
Asset quality remains healthy. The gross non-performing assets (NPAs) as on December 31, 2019 was 1.36% (1.18% as on March 31, 2019 and 1.11% as on March 31, 2018). The NPAs have witnessed an uptick from March 31, 2017 levels (0.79%), largely on account of delinquencies in non-individual portfolio, leading to an increase in NPAs in this segment to 2.91% as on December 31, 2019 from 1.16% as on March 31, 2017. NPAs in the individual portfolio stood comfortable at 0.75% as on December 31, 2019. With the slowdown in the real estate sector and incipient stress for developers, HDFC's sizeable exposure to the builder and corporate segments will remain a sensitivity factor.

* Diversified and stable resource profile
The resource profile continues to be well-diversified, lending flexibility to HDFC's borrowings. The borrowing mix primarily comprises of market borrowings (45%) and fixed deposits (32%). The share of term loans in overall borrowings stood at 19% as on December 31, 2019. HDFC raised external commercial borrowings (ECBs) of US$ 1.2 bn in fiscal 2019. HDFC's strong resource-raising capabilities, high fixed deposit renewals, and the high proportion of floating rate home loans in its portfolio mitigate the inherent tenure mismatch and interest rate risks in the housing finance business.

* Strong financial risk profile
Financial risk profile remains sound, marked by healthy capitalisation and earnings profile. As on December 31, 2019, HDFC (standalone) had an overall capital adequacy ratio¹ (CAR) of 18.6% and Tier-I CAR of 17.3%. Networth stood at Rs 89,584 crore as on same date. HDFC raised Rs 13,000 crore capital in Q4FY18. Further, conversion of warrants led to ~Rs 5,300 crore increase in networth in fiscal 2019. Adjusted gearing of the company stood at 5.2 times as on Dec-19.

The earnings profile is marked by healthy interest spreads, low expense levels, and good returns on networth. The interest spread has been at 2.15%-2.35% over the past five years (2.27% for the first nine months of fiscal 2020). The return on assets stood at 4.3% for the first nine months of fiscal 2020 (on an annualized basis) including profit on sale of investment for the stake sale in Gruh Finance and profits from fair value change on account of de-recognition of investments in Gruh Finance to tune of Rs 12,541 crore.

RoA was 2.2% for fiscal 2019, including the one-time consideration that HDFC received from the gains of Rs 891 crore through the listing of HDFC Asset Management Company in the August 2018.

Weakness
* Exposed to intense competition in the housing finance industry
HDFC is exposed to 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.