An A (sri) rating reflects the capacity to honour timely financial commitments.
HDFC’s rating reflects its strong operations, relatively low credit risk in the housing mortgage business, favourable non-performing loans (NPL) ageing, comfortable capital base and profitability, says Fitch in a statement on Friday.
HDFC’s market risk is relatively low, as the fixed rate long term housing loan portfolio is funded by similar long term borrowings.
This has enabled HDFC to manage its asset liability maturity to a large extent. HDFC’s loan book has had an 80:20 mix between mortgage loans and EPF loans over the past two years.
Despite a loan growth, HDFC’s absolute NPL’s are declining, due to better monitoring and quicker recovery efforts which includes focused follow-up. In 2003, NPL’s fell to 21 percent despite a 20.6 percent loan growth in the same period.
Gross NPLs/Gross loans were 11.1 percent in 2003 and have been on a declining trend since 2001. This improvement is largely on account of NPL recoveries and to some extent loan growth. Further net NPL/Equity ratio was at 58.9 percent as at Dec 2003.
“Going forward the challenge for HDFC would be to contain NPL’s in light of the high loan growth witnessed over the last few years,” notes Fitch.
HDFC’s operating expenses grew by 9.2 percent. Cost/income ratio has improved from 36.0 percent in 2000 to 32.5 percent in 2003. HDFC’s cost/income ratio is fairly low when compared with the commercial banks, which have cost/income ratios ranging from 50 percent – 70 percent.
Currently, HDFC is comfortably capitalised with a core capital ratio of 35.4 percent and a capital adequacy ratio (CAR) of 35.9 percent in 2003.
The comfortable CAR is largely due to the low risk weights (50 percent) attached to housing loans, which make up the majority of risk assets.
HDFC was incorporated as a building society in 1984, converted to a corporation in 2000. The bank moved up to a licensed specialised bank in 2003.
Since inception, HDFC focuses on lending to low income segments, which presently account for the majority of housing demand in Sri Lanka. The average loan size is about Rs. 170,000 at present.
However, rivals (commercial banks and other housing finance companies) have focused largely on the middle and upper income groups. Fitch says its unlikely that competitors will stray into HDFC’s market, due to its unattractiveness and different skills levels.
HDFC’s continuing strategy is to target the low income groups via its competences in providing total housing-loan solutions encompassing legal advice, architectural and other technical support provided at nominal charges.
Currently, HDFC has a network of 21 branches. But nearly 26 percent of funds disbursed in 2003 (42 percent in 2000) were concentrated in Colombo. HDFC’s top five districts accounted for over 50 percent of its loan portfolio in 2003 (72 percent in 2000).
Funding Mix
| 2000 | 2001 | 2002 | 2003 | |
| Borrowings | 63% | 64% | 73% | 66% |
| Equity | 19% | 19% | 16% | 16% |
| Other | 14% | 11% | 09% | 13% |
| Customer deposits | 05% | 05% | 02% | 05% |
(Source: Fitch Ratings)
Over the years, HDFC has raised Rs. 510.6 mn by securitizing its housing loan receivables, at fixed rates of 15 percent, and have five-year tenures (in order to match its loan structure).
Going forward HDFC will continue to focus on raising long term funds from the government, multilateral organisations and other local financial institutions in order to fund its loan growth.
The Sri Lankan government through National Housing Development Authority (NHDA) and Employees Trust Fund (ETF) owns 90 percent of HDFC. But an upcoming public offer to raise Rs. 600 mn will reduce the government’s stake to around 20 percent 30 percent.
Fitch Ratings Lanka Ltd is a joint venture between Fitch Ratings, USA, International Finance Corporation Washington, Central Bank of Sri Lanka and several other leading local financial institutions.
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