Property prices are the biggest concern for HDFC’s housing loan growth, the financial firm’s Managing Director Keki Mistry has said. "However, property prices are still low apart from those in the metros," he said.
"The penetration of mortgage versus the GDP ratio is still very low," he said. "We are looking to double our home loan disbursements. We are confident of achieving loan growth of at least 20%. We are already growing at 24% quarter-on-quarter."
Mistry said HDFC — the country’s largest home loan lender — was also examining an initial public offer (IPO) for its life insurance business.
Here is a verbatim transcript of the exclusive interview with Keki Mistry on CNBC-TV18.
Q: How was the mood at the conference? What are the key messages that HDFC had given to the investors?
A: As far as this conference was concerned, I just went for one presentation, so I don’t know what the mood amongst investors in this conference was. But by and large, I am meeting investors all the time. I think the investor mood is very strong, very bullish. People are a little worried about valuations – some of the long only investors in particular. But by and large, people are very happy with India, people believe that India’s growth story is sustainable and is there for a long period of time. So the mood is very good.
Q: The key message that you have given to the investors was that credit growth is still intact. What makes you so bullish?
A: What makes us bullish? It is various things. If we look at the Q2 of financial year, which the period from July to September this year and compare that with Q1 which is April to June, then in terms of individual loan approvals, our growth was 26%. Individual loan disbursements were higher by 24% and this is on a sequential basis. So if we take the year as a whole and extrapolate then the growth could be enormous.
Also, if you look at penetration of mortgages in India, it continues to be very low. The mortgage to GDP ratio in India is 7%. In the US this ratio is 80%, UK its 86%, Denmark is 93% but even if you look at developing counties then China is at 12% - though I believe the latest number is 14% but the official number is 12% – but most other developing Asian countries are all between 20-25%. In India, we are at 7%.
So even if 7% was to go to 14% we would be looking at doubling of the existing stock of housing loans before we even remotely get to a level of saturation and that process by itself would take out almost a decade.
Q: But the key thing that will maintain growth itself will be what Reserve Bank of India (RBI) does? What would the exit strategy for RBI be?
A: I don’t think and let’s be clear, people do not buy a house because interest rates are higher or interest rates are lower. I have said this consistently for the last many years. People buy a house because the house is affordable. The house price is right, their income is good, they are confident about their future – that is the reason people buy a house. Nobody goes and buys a house because interest rates are half percent higher or lower.
If you believe rates are higher at the moment you take a floating rate loan because when rates come down you will get benefit of floating rate loan. The biggest concern is property prices – property prices must remain affordable.
Q: We have seen an increase in property prices in Bangalore, Bombay and Delhi, how much of an increase will happen now you think?
A: If you take 2007, the peak was probably calendar 2007 end and early 2008, and if you compare that with January–February 2009, property prices by and large would have fallen by anything from 15% in some places to as much as 30–35%. So the drop would be anything between 15–35%. Prices have picked up again post May. If you look at Bombay or Delhi, it is not the right comparison but central Bombay or Delhi, the prices have run up a lot. They are back up 20–25% from the lows but in several other parts of the country prices have moved up but they have moved up maybe 5-10% from their lows. So today in most parts of the country, not Bombay and Delhi and not maybe some other big metros but in most other parts of the country property prices are still a lot lower than what they were at the peak.
Q: But there nothing to worry as of now?
A: Yes, whether property prices go up or not is really a function of affordability and the confidence level in people. As long as people are willing to pay higher price, prices will remain high. Prices have not gone up only because cost of construction has gone up or land prices have shot up but just that people are willing to pay a higher price, and therefore, developers have taken the prices higher.
Q: Did you update your investors about AMC and the life insurance IPOs?
A: As far as life insurance is concerned, we said we would be looking at an IPO. We have still not disclosed some key numbers on the insurance company like what is the embedded value, what is the new business profit margin. The only reason we have not disclosed these numbers is because we believe we need about 9–10 years experience in the business before you can start talking about these numbers in a more confident manner because these numbers are computed on the basis of a number of assumptions. These assumptions need to be tested over a period of time before you can say with confidence that these assumptions are right.
So we will be ready to disclose the new business profit margin and the embedded value number by March 2010 which is the end of this financial year and the IPO would happen after that.
Q: Are you already in talks with the regulatory authorities?
A: No, not yet.
Q: We can expect it at a year from March 2010?
A: You should expect it anytime after March 2010. But we haven’t zeroed down on any particular date. It would be probably, in the course of the next financial year or probably immediately after that but in the not too distant future.
Q: One key concern that most people keep having is the way the PSU banks are aggressive in their home loan segment – are you worried about it?
A: I talked about our growth – we grew 26% in terms of approvals and 24% in terms of disbursements on a sequential basis. This is just Q2 over Q1. We are very confident that we will have a growth of minimum of 20% this year and hopefully for the next few years. So good luck to whoever is there in the business.
But I can tell you that penetration is very low, shortage of housing in India is massive and one must also recognize that demographics in India are such that the housing market has to grow. About 60% of India’s population is below 30 years of age. Typically, a person finishes his post graduation at the age of 23-24 and then he then take up a job and would work for couple of years. So he would be working between 24-25-26 then he would get married, so marriage happens in mid-20s.
Again it’s a custom in India particularly with middle income people that the married couple will stay with the boys parents for a few years and then you get children. The children start going to school and then the extended becomes too large for the parents house, which they occupy, which is the time they look to buy a house.
So the average age of our borrower is 35 years and its not people in the 20’s who are buying houses but people in the mid-30s who are buying houses and with 60% of the population being below 30years of age – all these people will over the next 5-15 years will need housing.
Q: The funds, which were borrowed last year, you are likely to replace it with lower cost of funds this time. Will the benefit flow in Q3-Q4 onwards or have you already accounted?
A: We give matched loans. So when we give loans on a fixed rate basis to our customers, it is out of fixed rate funding. When we give floating rate loans, it is out of floating rate funding. Last year when interest rates went up so much, we did not borrow too much the wholesale market. We borrowed more from the retail market.
So if we looked at the month of October, when interest rates were at the highest and liquidity was at its lowest – 90% of our funding in the month of October came through retail deposits.
Mistry said HDFC — the country’s largest home loan lender — was also examining an initial public offer (IPO) for its life insurance business.
Here is a verbatim transcript of the exclusive interview with Keki Mistry on CNBC-TV18.
Q: How was the mood at the conference? What are the key messages that HDFC had given to the investors?
A: As far as this conference was concerned, I just went for one presentation, so I don’t know what the mood amongst investors in this conference was. But by and large, I am meeting investors all the time. I think the investor mood is very strong, very bullish. People are a little worried about valuations – some of the long only investors in particular. But by and large, people are very happy with India, people believe that India’s growth story is sustainable and is there for a long period of time. So the mood is very good.
Q: The key message that you have given to the investors was that credit growth is still intact. What makes you so bullish?
A: What makes us bullish? It is various things. If we look at the Q2 of financial year, which the period from July to September this year and compare that with Q1 which is April to June, then in terms of individual loan approvals, our growth was 26%. Individual loan disbursements were higher by 24% and this is on a sequential basis. So if we take the year as a whole and extrapolate then the growth could be enormous.
Also, if you look at penetration of mortgages in India, it continues to be very low. The mortgage to GDP ratio in India is 7%. In the US this ratio is 80%, UK its 86%, Denmark is 93% but even if you look at developing counties then China is at 12% - though I believe the latest number is 14% but the official number is 12% – but most other developing Asian countries are all between 20-25%. In India, we are at 7%.
So even if 7% was to go to 14% we would be looking at doubling of the existing stock of housing loans before we even remotely get to a level of saturation and that process by itself would take out almost a decade.
Q: But the key thing that will maintain growth itself will be what Reserve Bank of India (RBI) does? What would the exit strategy for RBI be?
A: I don’t think and let’s be clear, people do not buy a house because interest rates are higher or interest rates are lower. I have said this consistently for the last many years. People buy a house because the house is affordable. The house price is right, their income is good, they are confident about their future – that is the reason people buy a house. Nobody goes and buys a house because interest rates are half percent higher or lower.
If you believe rates are higher at the moment you take a floating rate loan because when rates come down you will get benefit of floating rate loan. The biggest concern is property prices – property prices must remain affordable.
A: If you take 2007, the peak was probably calendar 2007 end and early 2008, and if you compare that with January–February 2009, property prices by and large would have fallen by anything from 15% in some places to as much as 30–35%. So the drop would be anything between 15–35%. Prices have picked up again post May. If you look at Bombay or Delhi, it is not the right comparison but central Bombay or Delhi, the prices have run up a lot. They are back up 20–25% from the lows but in several other parts of the country prices have moved up but they have moved up maybe 5-10% from their lows. So today in most parts of the country, not Bombay and Delhi and not maybe some other big metros but in most other parts of the country property prices are still a lot lower than what they were at the peak.
Q: But there nothing to worry as of now?
A: Yes, whether property prices go up or not is really a function of affordability and the confidence level in people. As long as people are willing to pay higher price, prices will remain high. Prices have not gone up only because cost of construction has gone up or land prices have shot up but just that people are willing to pay a higher price, and therefore, developers have taken the prices higher.
Q: Did you update your investors about AMC and the life insurance IPOs?
A: As far as life insurance is concerned, we said we would be looking at an IPO. We have still not disclosed some key numbers on the insurance company like what is the embedded value, what is the new business profit margin. The only reason we have not disclosed these numbers is because we believe we need about 9–10 years experience in the business before you can start talking about these numbers in a more confident manner because these numbers are computed on the basis of a number of assumptions. These assumptions need to be tested over a period of time before you can say with confidence that these assumptions are right.
So we will be ready to disclose the new business profit margin and the embedded value number by March 2010 which is the end of this financial year and the IPO would happen after that.
Q: Are you already in talks with the regulatory authorities?
A: No, not yet.
Q: We can expect it at a year from March 2010?
A: You should expect it anytime after March 2010. But we haven’t zeroed down on any particular date. It would be probably, in the course of the next financial year or probably immediately after that but in the not too distant future.
Q: One key concern that most people keep having is the way the PSU banks are aggressive in their home loan segment – are you worried about it?
A: I talked about our growth – we grew 26% in terms of approvals and 24% in terms of disbursements on a sequential basis. This is just Q2 over Q1. We are very confident that we will have a growth of minimum of 20% this year and hopefully for the next few years. So good luck to whoever is there in the business.
But I can tell you that penetration is very low, shortage of housing in India is massive and one must also recognize that demographics in India are such that the housing market has to grow. About 60% of India’s population is below 30 years of age. Typically, a person finishes his post graduation at the age of 23-24 and then he then take up a job and would work for couple of years. So he would be working between 24-25-26 then he would get married, so marriage happens in mid-20s.
Again it’s a custom in India particularly with middle income people that the married couple will stay with the boys parents for a few years and then you get children. The children start going to school and then the extended becomes too large for the parents house, which they occupy, which is the time they look to buy a house.
So the average age of our borrower is 35 years and its not people in the 20’s who are buying houses but people in the mid-30s who are buying houses and with 60% of the population being below 30years of age – all these people will over the next 5-15 years will need housing.
Q: The funds, which were borrowed last year, you are likely to replace it with lower cost of funds this time. Will the benefit flow in Q3-Q4 onwards or have you already accounted?
A: We give matched loans. So when we give loans on a fixed rate basis to our customers, it is out of fixed rate funding. When we give floating rate loans, it is out of floating rate funding. Last year when interest rates went up so much, we did not borrow too much the wholesale market. We borrowed more from the retail market.
So if we looked at the month of October, when interest rates were at the highest and liquidity was at its lowest – 90% of our funding in the month of October came through retail deposits.
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