Wednesday, December 23, 2015

Profit growth may moderate for housing finance cos

At a time when banks were grappling with pressures of non-performing assets (NPAs) and slowing credit growth, the stock market shifted its preference to housing finance companies (HFCs). 

Take stocks like Indiabulls Housing Finance, LIC Housing Finance or Dewan Housing Finance, whose prices have more than doubled in the last two years. Even in shorter time frames of one, three, six and 12 months, these stocks have outperformed the S&P BSE Sensex. 

Ability to shop for funds at a lower cost, maintain NPA levels that are visibly lower than banks, thereby ensuring relatively subdued loan book delinquencies, and certain regulatory advantages have all made HFCs a better bet compared to banks. 

Experts, however, believe this could soon be a thing of the past as the Reserve Bank of India (RBI) has recently introduced a slew of reforms, which could plug the gap between HFCs and banks. 

Among others, the central bank has allowed lenders to raise bonds of seven years (or more) maturity for lending to infrastructure and affordable housing sectors with an exemption on key metrics such as statutory liquidity and cash reserve ratios. While narrowing the gap between HFCs and banks, this reform could also improve the competitive advantage of banks and strengthen their net interest margin (NIM). 

In addition to this, the RBI has also rationalised bank’s risk weight and loan to value for individual housing loans — a move which would make lending to the housing segment less stringent and better its return on equity. 

Recently, the central bank also revised its norms for fixing the lending rate, adding fuel to the competition among HFCs. 

Analysts believe that these regulatory changes, coupled with benign demand in the realty sector have taken away investors’ optimism towards HFCs. 

“Growth and margins will come under pressure as competition increases and real estate prices remain soft”, says Pankaj Agarwal of Ambit Capital. 

Concurring with this view, Abhinesh Vijayraj of Spark Capital suggests that as valuation of HFCs appear expensive, room for multiple (valuation) upside for stocks of HFCs may be limited, going forward. 

The ray of hope is, however, the fact that India’s mortgage loan market continues to remain under-penetrated, which according to Abhishek Kothari of Anand Rathi would ensure growth for HFCs while their profitability will be a concern going forward. 

Experts believe that HFCs, who are more focused on the retail mortgage business, may score better than those with higher proportion of commercial or builder book loans and hence remain positive on LIC Housing Finance, a stock which has returned 11% year-to-date. 

According to analysts at Nomura, LIC Housing Finance, with its high share of government employee business, should remain most immune to the current slowdown. The research firm expects the company to report 15% revenue increase each in FY16 and FY17 on the back of high growth in its loan against property segment and improving builder book from a weak base (now around 5% compared to peers at over 25%). 39 out of 47 analysts polled on Bloomberg have ‘buy’ recommendation on the stock. 

Likewise, analysts believe that the government’s focus on affordable housing could improve the prospects for HFCs with smaller loan ticket size such as Dewan Housing Finance, Gruh Finance, Can Fin Homes and Repco Home Finance. Among the lot, Dewan Housing despite its relatively low NIM (2.9% versus 3-4% of peers) emerges as most preferred stock thanks to its superior asset quality. 

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