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Banks/Financial Institutions
India
Housing Finance: Removal of pre-payment charges will affect business dynamics.
We believe the likely removal of pre-payment charges will increase the competitive
intensity in the housing loan market, thereby exerting pressure on NIMs. Notably, the
extant home loan book currently earns ~1.25-1.5% higher rate than new home loans,
thereby subsiding new customers; a removal of pre-payment charges will pull this
cushion. If the proposal is notified by the regulators, HFCs will need to realign their
business strategies likely for faster transmission of interest rates to new home loans. We
await regulatory clarifications and detailed guidelines to revisit our view on stocks.
Regulators review removal of pre-payment charges on home loans
In the recent ombudsman conference, it has proposed to remove prepayment charges on home
loans. This is currently an ‘action point’ and not yet a regulation. If officially notified by RBI, we
expect NHB to follow the same for housing finance companies (HFC).
Removal of pre-payments for refinance as well?
HFCs can currently charge prepayment penalty only if the loan is refinanced by another finance
company (or third party) and not if prepaid from borrowers’ personal resources. ICICI Bank
prepayment penalty is about 2% while Axis Bank does not have any such charges.
The recent RBI proposal does not seem to distinguish between the sources of funds i.e. self finance
and third party refinance. In this backdrop, predatory pricing by new players poses a risk to
existing players.
New home loans are currently subsidized
Banks and HFCs current offer new home loans at 10.5-11%. We estimate HFC’s marginal spread
(new home loan rates – borrowings cost) at 0.5-0.75% in the current (high) interest rate scenario.
This compares with overall spread of 2-2.2%. We believe higher interest rates on existing home
loans and developer loans earn higher yields and subsidize new businesses at the current juncture.
Notably, the economics of incremental business is linked to the interest rate cycle and will likely
improve hereon.
Higher prepayments in the new regime
We estimate that interest yields on the existing home loan portfolio are 1.25-1.5% higher than
new home loans rates (offered during the year) while developer loans earn 3.-3.5% more. The
removal of pre-payment charges (typically at 2% of loan amount) will likely encourage customers
to switch between housing finance companies for better home loans rates. In the past, festive
offers and teaser loans have encouraged customers to shift financers despite prepayment charges.
Lower operating leeway, pressure on NIM, faster interest rate transmission
We believe the proposal will have a lower impact on banks as compared to HFCs since the former
have multiple products in their portfolio to manage their NIM. Lower operating leeway for HFCs
(to manage their NIMs) will imply pressure on NIM and/ or a faster change in interest rates.
Early signs of competition
We await clarity on regulatory developments, meanwhile, we find early signs of competition
in the sector. Notably, the withdrawal of teaser loans by SBI in 1QFY12 considerably reduced
the competitive intensity in the home loan market; this now seems to be changing
With the withdrawal of discount schemes, the range in the interest rates offered by large
players has narrowed to 25-75 bps; for e.g., for home loans between Rs3-7.5 mn, the
lowest home loan rate is 10.75% and highest is 11.25%.
In order to widen its product portfolio, ICICI Bank recently launched one and two year
fixed rate home loan products. The interest rates offered by ICICI Bank are currently
about 50 bps lower than HDFC.
Earlier this week, HDFC also launched fixed-rate products. The fixed-rate periods for
HDFC’s loans are somewhat higher at three and five years. In light of high interest rates
for these products (10.75-11.75% for three-year, fixed-rate product and 11.25-11.75%
for five-year, fixed-rate product), we don’t find significant offtake.
Demand remains weak, poses risk to growth
Our real estate analysts see definite signs of weakness. The launches in June 2011 were
42% lower than average for rolling 12 months. Sales were also down 22% in June 2011.
According to channel checks, developers are focusing on “affordability” once again through
marginal discounts, easier payment terms or lower specs (size or quality of amenities).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
Housing Finance: Removal of pre-payment charges will affect business dynamics.
We believe the likely removal of pre-payment charges will increase the competitive
intensity in the housing loan market, thereby exerting pressure on NIMs. Notably, the
extant home loan book currently earns ~1.25-1.5% higher rate than new home loans,
thereby subsiding new customers; a removal of pre-payment charges will pull this
cushion. If the proposal is notified by the regulators, HFCs will need to realign their
business strategies likely for faster transmission of interest rates to new home loans. We
await regulatory clarifications and detailed guidelines to revisit our view on stocks.
Regulators review removal of pre-payment charges on home loans
In the recent ombudsman conference, it has proposed to remove prepayment charges on home
loans. This is currently an ‘action point’ and not yet a regulation. If officially notified by RBI, we
expect NHB to follow the same for housing finance companies (HFC).
Removal of pre-payments for refinance as well?
HFCs can currently charge prepayment penalty only if the loan is refinanced by another finance
company (or third party) and not if prepaid from borrowers’ personal resources. ICICI Bank
prepayment penalty is about 2% while Axis Bank does not have any such charges.
The recent RBI proposal does not seem to distinguish between the sources of funds i.e. self finance
and third party refinance. In this backdrop, predatory pricing by new players poses a risk to
existing players.
New home loans are currently subsidized
Banks and HFCs current offer new home loans at 10.5-11%. We estimate HFC’s marginal spread
(new home loan rates – borrowings cost) at 0.5-0.75% in the current (high) interest rate scenario.
This compares with overall spread of 2-2.2%. We believe higher interest rates on existing home
loans and developer loans earn higher yields and subsidize new businesses at the current juncture.
Notably, the economics of incremental business is linked to the interest rate cycle and will likely
improve hereon.
Higher prepayments in the new regime
We estimate that interest yields on the existing home loan portfolio are 1.25-1.5% higher than
new home loans rates (offered during the year) while developer loans earn 3.-3.5% more. The
removal of pre-payment charges (typically at 2% of loan amount) will likely encourage customers
to switch between housing finance companies for better home loans rates. In the past, festive
offers and teaser loans have encouraged customers to shift financers despite prepayment charges.
Lower operating leeway, pressure on NIM, faster interest rate transmission
We believe the proposal will have a lower impact on banks as compared to HFCs since the former
have multiple products in their portfolio to manage their NIM. Lower operating leeway for HFCs
(to manage their NIMs) will imply pressure on NIM and/ or a faster change in interest rates.
Early signs of competition
We await clarity on regulatory developments, meanwhile, we find early signs of competition
in the sector. Notably, the withdrawal of teaser loans by SBI in 1QFY12 considerably reduced
the competitive intensity in the home loan market; this now seems to be changing
With the withdrawal of discount schemes, the range in the interest rates offered by large
players has narrowed to 25-75 bps; for e.g., for home loans between Rs3-7.5 mn, the
lowest home loan rate is 10.75% and highest is 11.25%.
In order to widen its product portfolio, ICICI Bank recently launched one and two year
fixed rate home loan products. The interest rates offered by ICICI Bank are currently
about 50 bps lower than HDFC.
Earlier this week, HDFC also launched fixed-rate products. The fixed-rate periods for
HDFC’s loans are somewhat higher at three and five years. In light of high interest rates
for these products (10.75-11.75% for three-year, fixed-rate product and 11.25-11.75%
for five-year, fixed-rate product), we don’t find significant offtake.
Demand remains weak, poses risk to growth
Our real estate analysts see definite signs of weakness. The launches in June 2011 were
42% lower than average for rolling 12 months. Sales were also down 22% in June 2011.
According to channel checks, developers are focusing on “affordability” once again through
marginal discounts, easier payment terms or lower specs (size or quality of amenities).
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