Rating Rationale

Strengths
* Strong market position:
HDFC 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 September 30, 2017, HDFC's loan book stood at Rs 3,24,077, a growth of 17.7% over the previous year. Gross loans i.e. including loans securitized, stood at Rs 3,68,217 crore as on same date. The loan book and gross loans were Rs 2,96,472 crore and Rs 3,38,478 crore, respectively, as on March 31, 2017.

* Healthy asset quality
The asset quality of HDFC remains healthy. The gross non-performing assets (NPAs) as on September 30, 2017 was 1.14% (0.79% as on March 31, 2017). The uptick was largely on account of a delinquency in non-individual portfolio, leading to an increase in NPA in this segment from 1.16% as on March 31, 2017 to 2.18% as on September 30, 2017. NPAs in the individual portfolio stood at 0.65% as on September 30, 2017 (0.61% as on March 31, 2017). Nevertheless, 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 (57%) and fixed deposits (30%). The share of term loans in overall borrowing stood at 13% as on September 30, 2017. HDFC raised Rs 8300 crore masala bonds in fiscal 2017 and Rs 1300 crore in November 2017, at competitive rates. 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
HDFC's financial risk profile remains sound, marked by good capitalisation and profitability. As on September 30, 2017, HDFC had an overall capital adequacy ratio¹ (CAR) of 15.1% and a Tier-I CAR of 12.6% (14.5% and 11.8%, respectively as on March 31, 2017). HDFC's net worth was Rs 40,766 crore as on September 30, 2017 (Rs 39,645 crore as on March 31, 2017). On December 19, 2017, the Board of HDFC approved fund raising plans, up to an aggregate amount not exceeding Rs 13,000 crore.

HDFC's earnings profile is marked by healthy interest spreads, low expense levels, and good returns on net worth. The company has maintained an interest spread of 2.15% to 2.35% over the past four years (2.29 for the half year ended September 30, 2017 and 2.33% in fiscal 2017). The return on assets was 2.4% for fiscal 2017 (2.1%, annualized, for the half year ended September 30, 2017). HDFC received a one-time consideration post the IPO of HDFC Standard Life Insurance Company Ltd in November 2017.

Weakness
* Exposed to intense competition in the housing finance industry:
HDFC Ltd., being in a mono line business of housing finance and related products, is exposed to intensifying competition in the housing finance industry. Especially, of late, the housing finance industry has been facing intense competition on account of new entrants in the business, along with increased focus from the public sector banks.