Indian Mortgage Finance Market Updated for H1-FY16

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1 \ RESEARCH SERVICES Financial Sector Ratings Indian Mortgage Finance Market Updated for H1-FY16 Performance Review of Housing Finance Companies and Industry Outlook Contacts: Vibha Batra Karthik Srinivasan Supreeta Nijjar Manushree Saggar

2 Rs. trillion ICRA Industry Update % % % % Pace of growth stable % 5% 0.00 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 June-15 Sep-15 Housing Credit-HFCs and NBFCs Housing Credit -SCBs Housing Credit growth- HFC and NBFCs Housing Credit growth SCBs Housing Credit Growth Overall Source: ICRA Estimates, RBI In line with ICRA s estimates, the total housing credit outstanding in India as on September 30, 2015 crossed Rs trillion as against Rs trillion as on March 31, 2015, indicating an annualized growth of 17% H1FY16. There has been some pick-up of growth in Q2FY16 vis-à-vis the 14% annualized growth in Q1FY16 supported by disbursements on construction linked loans, growth in the small ticket affordable housing segment and demand from Tier II/III cities and some increase in primary sales during the festive season. If we were to segregate the market based on various types of participants there would broadly be two sets banks (constituting 63% of the overall market) and HFCs/NBFC (37%). While the overall banking sector credit growth remains muted, housing credit growth for banks has been higher than previous years (17% annualized in H1FY16), driven by the increased focus of banks on retail loans such as housing given the asset quality related challenges in their corporate loan books and their ability to offers loans at relatively competitive interest rates leading to higher balance transfers from HFCs to banks The growth for HFCs and NBFCs (16% annualized in H1FY16) has largely been driven by the higher growth in the portfolio of the smaller HFCs (Assets under management less than Rs. 450 billion), which are operating in the high growth segments like low income/affordable housing and self employed segment. 0% ICRA Rating Services Page 2

3 Regulatory changes to encourage low ticket affordable housing finance; coverage under SARFAESI to help HFCs in recoveries Over the last 3-4 months various regulatory changes have been announced, starting with the lowering of risk weights (further from 50%) for housing loans, 41 HFCs getting SARFAESI license, as well as the revision in interest rate and the on-lending cap under the Rural Housing Fund (RHF) and Urban Housing Fund (UHF), which are likely to support growth in the low ticket affordable housing segment. Lower risk weights on low ticket home loans could encourage lenders to lend more to the smaller ticket home loan segment, as it would help them in conserving capital. However, from a risk perspective, this may be negative as the target borrower s credit profile is weaker and more vulnerable (owing to limited cushion for exigencies and to absorb income shocks) compared to the prime salaried home loan borrower. Coverage under SARFAESI is positive from a recovery perspective though it might be difficult to get self-occupied properties vacated. Nevertheless it could be an important recovery tool for HFCs and would help them minimize the loss, given default. Revision on the lending spread cap by NHB under RHF and UHF from 2% earlier to 3.5% is a positive for the sector especially for HFCs operating in the small ticket housing loans segment. However the relatively established players who have achieved a reasonable scale of operations are likely to benefit more vis-à-vis the newer players given that the new entrants in the affordable housing finance space are scaling up operations and hence have high operating expenses. As per ICRA s estimates, even on a steady state basis HFCs catering to these segments are likely to have higher operating expenses (~4-5% in relation to average assets) vis-a-vis the traditional higher ticket prime home loans segment and thus will require operating at a spread of at least 6% -7% to be able to report reasonable returns. ICRA Rating Services Page 3

4 Competitive intensity increasing Asset Quality indicators continue to hold; overall portfolio vulnerability increasing Adequate Capitalisation; supported by external capital infusions as well as good internal capital generation Over the last few years the housing finance market has continued to report robust growth despite challenges in the economy, which has made this segment attractive for both banks as well as non-banking finance companies (NBFC). Consequently, there have been a large number of new entrants in the market some HFCs have been floated by existing NBFCs while others are new companies started by new entrepreneurs supported by private equity players. This coupled with a prolonged slowdown in the real estate and hence lower primary sales have led to increased competition in the industry. Further, a significant share of sourcing from direct sales agents whose commissions are based on incremental disbursements files sourced, nil prepayment penalties are encouraging balance transfers along players as lenders typically charge lower interest rates to new borrowers and offer incentives in terms of lower processing fees and some relaxation in lending norms (for example relaxation in terms of LTVs/FOIRs or higher top-up loans). While so far the asset quality indicators continue to be good (Gross NPA% of 0.78% as on September 30, 2015), given the increasing portfolio vulnerability owing to competitive pressures as well as increased focus of some of the players on riskier products (like LAP and builder loans), and a change in the borrower profile towards the self-employed and lowincome segment (where income streams could be more volatile). Nevertheless, the strong monitoring and control processes, borrowers own equity in the property and the large proportion of borrowers staying in self-occupied property could reduce the impact of the above mentioned concerns on asset quality to some extent. Overall ICRA has revised the projection for Gross NPA% for HFCs to be around between 0.8% - 1.2% for FY16. The investor sentiment for the housing sector remains good as reflected by the recent capital infusions to the tune of Rs. 45 billion in YTD FY16 (Rs. 26 billion in FY15). In ICRA s estimates, HFCs will need an external capital of around Rs billion (30-50% of the present net worth) to grow at 20-22% over the next 5 years, assuming an internal capital generation of 16% (post dividends) while maintaining the capitalisation levels at current levels. Part of this capital could also be in the form of mortgage guarantee. ICRA Rating Services Page 4

5 Diversified Funding Mix, some shift towards debt market borrowings As per ICRA s estimates almost 65% of the HFC borrowings were at fixed rates of interest, which could pose an interest rate risk for these players in a declining interest rate scenario. However, the risk is somewhat mitigated by the fact that these borrowings are not very long-dated (average maturity of around 3-5 years) and/or have reset clauses, thus giving the HFC s some flexibility to reset the rates. At the same time, given the limited sources of long term funds to match the tenure of home loans (average maturity of 8-10 years including prepayments), asset liability management continues to remain a challenge for HFCs. As for the incremental fund requirement, factoring in an estimated credit growth of 20-22% in FY16, and the refinancing requirements, ICRA estimates that HFCs would need to mobilize ~Rs trillion during FY16. Assuming HFCs maintain a similar borrowing mix incremental fund requirements from banks (including NHB refinance) would be to the tune of ~Rs billion, while fresh NCD issuances would be at ~Rs billion. Stable Profitability Indicators In terms of key performance indicators, HFCs continued to report good profitability indicators with an Return on Equity (ROE) of 18.76% in H1FY16 (20% for FY15). ICRA expects the spreads to decline marginally by bps owing to the high competitive scenario, which could lead to dilution in incremental spreads. Non-interest income could also reduce due to lower processing fees charged from the customer. However, profitability is likely to be supported by stable operating expenses and credit costs and as per ICRA s estimates, HFCs will generate good returns (ROE of 17-19%) for FY16. ICRA Rating Services Page 5

6 Subscribe to the report for the following An Overview of the Mortgage Finance Market in H1FY2016 Distribution of ICRA Ratings Key Credit Factors and Outlook influencing HFCs Profiles Key Industry and Regulatory Updates PERFORMANCE UPDATE FOR HFCs o Portfolio Mix and Growth o Asset Quality Indicators o Borrowing Profile o Capitalisation o Profitability Indicators Consolidated Financials of ALL HFCs for H1FY16 Consolidated annual financials for HFCs updated till FY15 ICRA Rating Services Page 6

7 CORPORATE OFFICE Building No. 8, 2 nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon Tel: ; Fax: Website: REGISTERED OFFICE 1105, Kailash Building, 11 th Floor; 26 Kasturba Gandhi Marg; New Delhi Tel: ; Fax: Branches: Mumbai: Tel.: + (91 22) / /53/62/74/86/87, Fax: + (91 22) Chennai: Tel + (91 44) , Fax + (91 44) Kolkata: Tel + (91 33) / / / , Fax + (91 33) Bangalore: Tel + (91 80) Fax + (91 80) Ahmedabad: Tel + (91 79) /5049/2008, Fax + (91 79) Hyderabad: Tel +(91 40) /7251, Fax + (91 40) Pune: Tel + (91 20) /0195/0196, Fax + (91 20) Copyright, 2016, ICRA Limited. All Rights Reserved. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies, while publishing or otherwise disseminating other reports may have presented data, analyses and/or opinions that may be inconsistent with the data, analyses and/or opinions presented in this publication. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. ICRA Rating Services Page 7

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