Hugh Young, manager of the Aberdeen New Dawn (ABD) and New India (NII) investment trusts (read our tip on New India), explains why India's Housing Development Finance Corporation is a favoured holding.
Housing Development Finance Corporation (HDFC) is a financial conglomerate that operates in areas beyond mortgages, including life and general insurance, and property. It sells deposit and loan products in more than 2,400 towns and cities. In recent quarterly earnings news, HDFC and associate HDFC Bank's solid results were bolstered by steady loan growth.
"A core holding for more than 10 years, HDFC is our preferred play in India's mortgage financing sector," he says. "The country's largest housing loans provider, it gives exposure to a market characterised by structural shortage, rising wealth levels and low penetration: mortgages make up a much smaller proportion of India's gross domestic product (GDP), compared to China and the UK. Housing Development Finance Corporation's home loans growth rate of 25 per cent is higher than the industry average of 17 per cent, helped by its solid reputation and extensive reach. At the same time, non-performing loans have stayed below 1 per cent over most years."
Although the financial sector has faced increased competition and elevated interest rates, he says that HDFC's key strengths, notably a robust capital base and solid asset quality, have ensured its continued market leadership. The core measures of a bank's financial strength, tier one capital ratio and total capital ratio, are well above regulatory requirements at around 13 per cent and 15 per cent, respectively. "The company has expanded from banking and insurance into asset management, but without sacrificing its record of consistent growth in earnings and profits," he says.
The company is the second largest holding in New India's portfolio accounting for 9.3 per cent of assets.
