ICRA RESEARCH SERVICES Financial ICRA RATING FEATURE Sector Ratings Indian Mortgage Finance Market Updated for Q1-FY16 Performance Review of Housing Finance Companies and Industry Outlook Contacts: Vibha Batra +91 124 4545 302 vibha@icraindia.com Karthik Srinivasan +91 22 61143444 karthiks@icraindia.com Supreeta Nijjar +91 124 4545324 supreetan@icraindia.com Manushree Saggar +91 124 4545316 manushrees@icraindia.com
Rs. trillion ICRA Industry Update This ICRA report discusses the developments in the Indian mortgage finance market and the performance of housing finance companies during Q1FY16 (i.e. from April 1, 2015 to June 30, 2015). 12.00 Housing Credit Growth Trends 30% Pace of growth slows down; long term growth outlook remains favourable 10.00 8.00 6.00 4.00 25% 20% 15% 10% 2.00 5% 0.00 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 June-15 Housing Credit-HFCs and NBFCs Housing Credit -SCBs Housing Credit growth- HFC and NBFCs Housing Credit growth SCBs Housing Credit Growth Overall 0% Source: ICRA Estimates, RBI According to ICRA s estimates, the total housing credit outstanding in India as on June 30, 2015 crossed Rs. 10.9 trillion as against Rs. 10.5 trillion as on March 31, 2015, indicating an annualised growth of 14% Q1FY16. While housing credit growth has been outperforming the systemic banking credit growth despite the difficult economic conditions, recent numbers suggest some moderation in the pace of growth with housing credit growth in the recent quarter being lower than the five year CAGR of 18% owing to a decline in primary housing sales volumes and stagnant property prices. ICRA expects some uptick in growth numbers in the remainder of the financial year, however the growth estimate for FY16 has been revised downwards to 16-18%, likely to be supported by disbursements on construction linked loans, growth in the small ticket affordable housing segment and demand from Tier II/III cities. Nevertheless, long term growth outlook for the sector remains favourable owing to the Government of India s focus on Housing for All by 2022, and favourable regulations, could push overall housing credit growth to 20-22% from FY17 onwards. 2
Credit Growth vs Asset Quality Indicators for the Housing Finance Market Affordable Housing segment growing at a faster pace, Overall Portfolio vulnerability increasing, asset quality could deteriorate going forward Source: Financials of various HFCs, banks, RBI and ICRA estimates 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%). However, within the HFCs, if we were to differentiate on the basis of asset size, there would be only four HFCs, which would fall under the category of Large HFCs (Assets under management greater than Rs. 450 billion). The balance would all be Small HFCs. The smaller HFCs have shown a higher pace of growth and also have a moderately weaker asset quality compared to the larger counterparts. The other emerging segment is of the HFCs in the affordable housing space. The newer entrants in this segment are growing at CAGR of over 50% albeit on a lower base. At the same time, given the higher vulnerability associated with the target borrower, the asset quality is weaker Though, so far HFCs have been able to maintain their asset quality (Gross NPA% of 0.79% as on June 30, 2015), in ICRAs opinion, the overall portfolio vulnerability is increasing with an increased focus of some of the players on riskier products (like LAP and builder loans), change in the borrower profile towards the self-employed and lowincome segment (where income streams could be more volatile) and increased competitive intensity in the HFC market has led to some dilution in lending norms (for example relaxation in terms of LTVs/FOIRs). 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 an extent. Overall ICRA has marginally revised the projection for Gross NPA% for HFCs to be 3 around between 0.8% - 1.2% over the medium term.
Credit Growth vs Asset Quality Indicators for the Housing Finance Market Affordable Housing segment growing at a faster pace, Source: Financials of various HFCs, banks, RBI and ICRA estimates Overall Portfolio vulnerability increasing, asset quality could deteriorate going forward 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%). However, within the HFCs, if we were to differentiate on the basis of asset size, there would be only four HFCs, which would fall under the category of Large HFCs (Assets under management greater than Rs. 450 billion). The balance would all be Small HFCs. The smaller HFCs have shown a higher pace of growth and also have a moderately weaker asset quality compared to the larger counterparts. The other emerging segment is of the HFCs in the affordable housing space. The newer entrants in this segment are growing at CAGR of over 50% albeit on a lower base. At the same time, given the higher vulnerability associated with the target borrower, the asset quality is weaker Though, so far HFCs have been able to maintain their asset quality (Gross NPA% of 0.79% as on June 30, 2015), in ICRAs opinion, the overall portfolio vulnerability is increasing with an increased focus of some of the players on riskier products (like LAP and builder loans), change in the borrower profile towards the self-employed and lowincome segment (where income streams could be more volatile) and increased competitive intensity in the HFC market has led to some dilution in lending norms (for example relaxation in terms of LTVs/FOIRs). 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 an extent. Overall ICRA has marginally revised the projection for Gross NPA% for HFCs to be 4 around between 0.8% - 1.2% over the medium term.
Lower risk weights on low ticket home loans to encourage banks to lend more to the smaller ticket home loan segment. However, this could lead to lower capital in relation to (higher) risk in affordable housing segment The lowering of risk weights (further from 50%) for housing loans, could translate into thin capital cushion to cover the unexpected losses. 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(especially in ticket sizes less than Rs 2 million ) is weaker and more vulnerable (owing to limited cushion for exigencies and to absorb income shocks) as compared with the prime salaried home loan borrower. This is also reflected in the relatively higher Gross NPA% for lower ticket size (less than Rs. 0.5 million) home loans of public sector banks (4.4% as on March 31, 2014) vis-a-vis home loans with ticket sizes greater than Rs 2.5 million (0.62% as on March 31, 2014). As for variability in asset quality indicators, Gross NPA% changed by 110 bps in low income category over one year, the change was only 39 bps for home loans greater than Rs 2.5 million during the same period. Larger variability may warrant higher capital requirements for this segment from prudent risk management perspective. Adequate Capitalisation; supported by external capital infusions as well as good internal capital generation Investor sentiment for the housing sector remains good as reflected by the recent capital infusions to the tune of Rs. 42 billion till September 30, 2015 (Rs. 26 billion in FY15). In ICRA s estimates, HFCs will need external capital of around Rs.180-280 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. 5
Diversified Funding Mix, some shift towards debt market borrowings FY15 witnessed some shift in the borrowing profile of HFCs towards debt market instruments like NCDs and Commercial Paper, given that there was a softening of interest rates, while base rates remained largely stable till the end of the financial year. 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. 1.9-2.1 trillion during FY16. Assuming HFCs maintain a similar borrowing mix incremental fund requirements from banks (including NHB refinance) would be in the tune of ~Rs. 800-900 billion, while fresh NCD issuances would be at ~Rs. 950-1000 billion. Stable Profitability Indicators In terms of key performance indicators, HFCs continued to report good profitability indicators with an ROE of 18.51% in Q1FY16. ICRA expects the spreads to decline marginally by 10-15 bps owing to the high competitive scenario, which could lead to dilution in incremental spreads as well as 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. 6
Subscribe to the report for the following An Overview of the Mortgage Finance Market in Q1FY16 Distribution of ICRA Ratings Key Credit Trends Key Industry Updates Performance Update and Outlook Portfolio Mix Asset Quality Borrowing Profile Liquidity Profile Capitalisation Profitability Indicators 7
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