HDFC Ltd (HDFC IN, Rs696.05, Sell) – Impact of the revised NHB guidelines: RBS

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HDFC Ltd (HDFC IN, Rs696.05, Sell) – Impact of the revised NHB
guidelines

National Housing Bank (NHB) has revised its guidelines on maximum loan to value ratio
(LTV), risk weights and provisioning requirements applicable to housing finance companies.
We believe that these changes are unlikely to have a material impact on earnings / capital
adequacy of HDFC Limited.
NHB – Key changes are:
Maximum loan to value ratio (LTV) cannot exceed 90% for loans up to Rs2m and 80% for
loans above Rs2m.
Housing finance companies will have to make 2% standard provisioning in respect of
housing loan portfolio at teaser/special rates.
Risk weight of 75% for housing loans above Rs3m but lower than Rs7.5m provided the
LTV<=75%.
Risk weight of 100% for housing loans where LTV>75% provided the loan is up to
Rs7.5m.
Risk weight of 125% for loans above Rs7.5m irrespective of the LTV ratio.

Impact analysis
The above guidelines are broadly in line with the new regulations applicable to banks in
this regard as amended by RBI recently.
At HDFC Limited, the individual housing loan book was Rs683bn as of September 2010
(64% of total loan book). According to management (source: CNBC), about Rs200bn
currently falls under the teaser/special rate/dual rate category. As per new directions,
HDFC will have to provide 2% on this portfolio which works out to about Rs4bn.
As of September 2010, HDFC Limited has Rs7.3bn provision against the NHB regulatory


requirement of Rs3.5bn. Thus, HDFC Limited has sufficient cushion to absorb the new
regulatory provision requirement and thereby it will likely have no material impact on earnings.

Also, the change in risk-weights/LTV is unlikely to have a material impact on capital adequacy.
HDFC's Tier-I capital ratio was 13.0% as of September 2010 (regulatory minimum is 6.0%). At
HDFC Limited, the average ticket size of the loan is about Rs1.7m. Further, at origination the
maximum LTV is 85% while the actual average LTV is about 65-67%.