HDFC - Best stock to invest in Banking sector

Strong risk management systems, a diversified loan portfolio and an impeccable track record make HDFC a best stock for long term investment.

Growing urbanisation, rising disposable incomes and favourable demographics would ensure that demand for housing continues to remain robust. Housing Development Corporation of India (HDFC), is a market leader in the housing mortgage space. Retail mortgage accounts for around two-thirds of its total loan book.

In the retail segment, more than 90 per cent of the individual borrowers are in the salaried class, where default rate is nominal. Strict monitoring and lower loan-to- value allowed to borrowers, has enabled HDFC to its assets quality. Says Keki Mistry, VC and MD, HDFC, “We have always focused on loan quality and not market share, ensuring that the loan appraisal systems and loan recovery processes are aligned to achieve this objective.”

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The company’s gross income and net profit have grown at a CAGR of 27 per cent in the last five years, which reflects a consistent track record. The recent RBI initiatives of hiking the priority sector lending limit to Rs 20 lakh for housing loans should further ease liquidity. Reduction of risk weights on loans and advances to commercial real estate, along with cut in CRR and repo rate would lead to lower cost of funds.

Leveraging the distribution network of its subsidiary, HDFC Bank, to source loans in Tier 2 and 3 cities would ensure greater business from these regions. Among other subsidiaries are HDFC Standard Life and HDFC Mutual Fund, which also have huge growth potential. Together, they are valued at Rs 700 per share of HDFC. Currently, the stock trades at 2.7 times its FY10 price-to-book value (standalone). Overall, HDFC’s track record of sustaining earnings in all the business cycles and an underpenetrated mortgage market, would ensure healthy returns for many years to come.
Source: Business Standard

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