What's in store for housing finance stocks

Covid-19 has impacted economic activity in multiple ways. For the housing market too, while the lockdown hit construction projects, ‘work from home’ norms led to

additional housing demand. A low interest rate environment for borrowings also helped in the process, along with concessions such as stamp duty cuts in certain States. But the way forward is not without challenges.

Even as the household cash crunch weighs heavy on their delinquencies for housing finance companies (HFCs), banks are competing fiercely against them, with cut-throat pricing. To top it all, the regulatory gauntlet is being thrown at them from time to time. Against this backdrop, we discuss three key trends that investors in housing finance stocks should watch out for.

#1 Growth drivers intact

While the loan book of HFCs (aggregated by National Housing Bank) grew by 6.8 per cent in FY20, it tapered in FY21 with the onset of the pandemic. However, given the pronounced pick-up in the second half of the year and the moratorium containing the repayments, the loan growth remained positive in FY21. Listed HFCs saw an aggregate growth of 7 per cent in FY21, compared to a mere 3.7 per cent in FY20 (largely led by a 29 per cent drop in the AUM of Indiabulls Housing Finance).

Large HFCs with their existing focus on retail loans, such as HDFC and LIC Housing Finance, reported a healthy 10 per cent growth in their loan book whereas mid-sized players such as PNB Housing Finance and Indiabulls Housing Finance witnessed a drop in their overall loan book (down 8 and 10 per cent respectively), owing to their strategies to shrink their beleaguered corporate exposure.

Some HFCs also faced stiff competition from banks. Repco Home Finance, for instance, reported a tepid growth of 2 per cent in its loan book.

Some others such as Aavas Financiers and Home First Finance, thanks to their exposure to unbanked segments and low ticket sizes, reported a healthy growth in loan book in FY21 — up 21.3 and 14 per cent (y-o-y), respectively.

Going forward, growth in the near term could continue to be dictated by the way the pandemic pans out. For a few professionals, the pandemic has kindled the need for bigger, better homes, to continue working from home and this spells good news for lenders. For a few others, however, the Covid outbreak has changed the perception on assuming longer tenure debt, given the uncertainty around incomes and jobs.

However, there are structural factors in favour. Low market penetration of housing loans in the country (about 10 per cent of GDP in 2020) and the Centre’s continuing thrust on affordable housing (CLSS in the Low Income Group and Economically Weaker Section segments and foray into rental affordable housing) are good for housing demand. Homes have also now become more affordable, given the benign real estate prices, sharp stamp duty cuts and low interest rates.

Leading HFC players showed good growth in the June 2021 quarter too. While HDFC and LIC Housing Finance (LIC HF) saw a healthy 10 per cent plus growth in loan book, despite their large base, players in the affordable housing space such as Can Fin Home and Aavas Financiers saw their loan books grow by 7 per cent and 22 per cent (y-o-y), respectively in June 2021. Home First Finance Company, with its relatively smaller base, grew by 18.5 per cent y-o-y in the first quarter of FY21.

Despite the non-extension of the CLSS for the middle income group (MIG), HDFC, which has the largest number of customers availing the benefits under CLSS, continued to witness healthy traction in the MIG segment. About 44 per cent of the company’s loan approvals in the June 2021 quarter, in value terms (48 per cent in terms of number) were from the MIG segment only (customers with household income of ₹6 lakh to ₹18 lakh).

Experts, however, say that banks may continue to witness higher growth in their home loans compared to HFCs, given their funding profile. Post the IL&FS crisis, housing finance companies have been losing their share of the pie to banks — from 42 per cent in FY18 to 33 per cent in FY20. With the ability to offer lower interest rates (given higher share of low-cost deposits in their funding profile) banks may continue to inch up their share in the years to come.

The management of Repco Home Finance highlighted the same in their earnings conference call of FY21. The company witnessed an annual run-off of 12 per cent in its loan book through balance transfers to banks. This, coupled with just 6 per cent growth in disbursements, dragged its overall AUM to ₹12,121.5 crore in FY21 — up only 2 per cent over last year. Can Fin Homes was able to curb the competition by lowering its yields, which continue to have a bearing on the company’s margin (down 39 basis points y-o-y in the June quarter to 3.31 per cent).

Even this being the case, HFCs with niche presence in non-metro, semi-urban and rural pockets of the country (such as Aavas Financiers), catering to the needs of the unbanked customers, may continue to grow at a healthy pace.

#2 Regulatory brakes

While the demand scenario seems bright, investors in HFC stocks need to watch out for the profitability metrics of the companies which could by impacted due to new regulations.

With the RBI tightening its control of HFCs, the impending juggle in their portfolios is likely to have a bearing on their profitability metrics in the near to medium term. The regulations (applicable from FY22 onwards in a phased manner) now mandate an HFC to lend at least 60 per cent of its assets towards housing finance, failing which it might lose the HFC licence. Besides, what constitutes a housing loan has also been clearly defined — loans given for the purpose of the purchase/construction of a new dwelling unit or renovation of an existing dwelling unit. The rest, including loan against property, shall be categorised as non-housing loans.

Further, at least 50 per cent of the total assets of an HFC need to be deployed towards housing finance for individuals.

A look at the break-up of their loan mix suggests that most HFCs are currently compliant with these norms. Individual housing loans constitute about 78 and 90 per cent for LIC Housing Finance and Can Fin Homes, respectively.

However, the falling share of developer loans and non-housing loans (including LAP) could negatively impact the yields and spreads on the HFC’s loan portfolios. For instance, in FY21, HDFC earned a spread of 1.93 per cent on individual loans and 3.22 per cent on non-individual loans.

Besides, the regulations also mandate HFCs to maintain sufficient liquidity buffers to withstand potential liquidity disruptions. This need to park higher amounts in liquid assets may further lower the average yield on total assets for HFCs.

Secondly, in June 2021, the RBI had stipulated guidelines for determining the eligibility and maximum payout ratio for distribution of dividends by NBFCs (including HFCs).

Per the guidelines, HFCs are required to maintain a minimum capital ratio of 15 per cent (from FY22 onwards) and a net NPA ratio of less than 6 per cent in each of the last three financial years (including the year for which dividend is paid).

Companies such as HDFC, Repco Home Finance and Can Fin Homes are known for their consistent dividend track record. Besides consistent track record, LIC HF and Indiabulls Housing Finance also post strong dividend yields at their current market price.

While most HFCs have maintained a healthy capital adequacy ratio of above 20 per cent, LIC Housing Finance sits on the borderline — CRAR at 15.28 per cent in FY21. While the company’s promoters recently infused about ₹2,335 crore worth of equity, more capital may be required to fund the growth, given the likely stress in asset quality. Last year, owing to a 59 per cent y-o-y spike in overall Stage 3 assets, LIC HF saw a modest increase of 139 basis points (y-o-y) in its CRAR in FY21 to 15.28 per cent, despite adding ₹1,800 crore through tier 2 bonds in the second half of FY21.

Hence, dividend investors may need to be watchful.

#3 Looming asset quality stress

Financing companies witnessed heightened stress in their retail assets in the recent June quarter. Given the cash crunch in household finances, HFCs were no exception. In the June 2021 quarter, PNB Housing finance saw its retail GNPAs spike by 47 per cent (over March 2021) to ₹1,873 crore. This, coupled with an 18 per cent (QoQ) increase in corporate GNPA, led to a 156 basis points (bps) increase in the overall GNPA to 6 per cent in June 2021. Its net NPA was at 3.61 per cent.

Heightened stress was witnessed in the self-employed portfolios of HFCs, but the salaried segments also suffered. The gross Stage 3 assets (Ind-AS equivalent of GNPA) of Repco Home Finance also spiked by 70 bps in the first quarter of FY22 to 4.4 per cent. This was led by the non-salaried segment that comprises 51.5 per cent of the company’s loan book. The bad loans in this segment spiked to 6.9 per cent in June 2021 quarter — up 110bps from 5.8 per cent in March 2021, while that of the salaried segment inched up only 40 bps, over the same period.

HDFC, with its salaried heavy portfolio (81 per cent of individual loans), witnessed a 38 bps (QoQ) hike in the bad loans in its individual segment, to 1.37 per cent in June 2021.

Despite 91 per cent of its loans being lent to salaried individuals, LIC HF also saw its Stage -3 assets spike 181 bps (QoQ) to 5.93 per cent in the first quarter of FY22. The higher delinquencies in the retail portfolio speak for its quality of underwriting.

Players with a more granular loan book — average ticket size of loans below ₹10 lakh (housing loans) — were able to contain the spike in delinquencies, in the June quarter gone by. Aavas Financiers, a leading player in the affordable housing segment, was able to contain the spike in its bad loans despite its heavy reliance on self-employed segment (60.3 per cent of outstanding loans in June 2021). The Gross stage-3 assets only inched up by 16 bps (QoQ) to 1.14 per cent in June 2021.

With 73 per cent of its loans given out to salaried and professionals segment, Can Fin Homes maintained its GNPA at 0.9 per cent in June 2021, compared to 0.91 per cent in March 2021.

Home First Finance company, which recently debuted on the exchanges, also witnessed a small 10 bps (QoQ) increase in its Gross Stage 3 assets to 1.9 per cent in the first quarter of FY22.

The stress in asset quality may be here to stay for the coming couple of quarters, given the sporadic lockdowns in many parts of the country and likely third wave of infections. Those with good provisioning and adequate capital will be better placed to ride over the uncertainty.

Wait and watch

Thus, while growth prospects seem sanguine for housing finance companies, the impact of regulatory issues and deterioration in asset quality need to be watched.

On the positive side, given the low loan to value (LTV), HFCs can withstand the near-term tide of delinquencies with adequate provisioning buffers.

Besides, with ample capital infusion in FY21, despite increased provisions, companies (barring LIC HF) also seem well-capitalised to fund their growth pipeline. For instance, Indiabulls Housing Finance raised a total of ₹3,771 crore (combination of equity and bonds) in FY21, taking its CRAR to 30.7 per cent.

Growth is expected to be higher in HFCs operating in niche segments — such as Aavas Financiers. Besides, by lowering yields, while CanFin Homes is well placed to ride the tide of high growth, its margins may see some pressure in the near term. The former is assigned a higher valuation of 8.1 times its FY21 book, owing to its strong risk containment (low NPAs despite heavy exposure to self-employed segment) and steady yields.

Among the larger HFCs, HDFC continues to trade at premium valuations given its superior metrics (low GNPA, steady loan growth and margins).

The stocks of PNB Housing Finance, Indiabulls Housing Finance, and LIC Housing Finance have lost investor interest on account of the legacy issues in their corporate exposure. Given their recent strategies to ramp up their retail exposure, investors need to wait and watch for the managements’ plans to pan out. Indiabulls Housing Finance, for instance, has entered into co-lending arrangements with HDFC, YES Bank, Central Bank of India and RBL Bank (for home loans and MSME loans). While these arrangements will bring in a large franchise of customers, only 20 per cent of loans sourced will be retained in the books of the company. Remaining 80 per cent will be on the partner’s book.

Besides, for others trying to ramp up their retail portfolio, only time will tell if they will be able to prove their mettle in terms of credit underwriting for such newer segments.

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