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New regulatory guidelines
The order to discontinue pre-payment penalty levied by HFCs may have a
nominal (1%) impact on HDFC’s earnings however, lower charges may
influence higher prepayments causing volatility in growth and ALM issues
for lenders. The regulator has also proposed HFCs to charge uniform rates
to existing and new clients, but this may be difficult to implement due to
subjectivity on credit risk and other operational issues. Uniform rates may
hurt spreads but may also deter lenders from poaching clients from peers
by offering lower rates. Key risk is that if competitive environment gets
irrational, growth and earnings impact could be significant.
No pre-payment penalty-low earnings impact, but higher volatility
National Housing Bank (NHB), regulator for housing finance companies (HFC),
has asked then to discontinue levy of pre-payment penalties on housing
loans. RBI also proposes to implement such norms for banks. Currently, HDFC
and most peers charge prepayment penalties in the range of 0.5-2% of
amount prepaid only if it (1) exceeds 25% of outstanding amount in any year,
(2) is made in first 3 years and (3) in few cases, if its not made through own
resources. We believe that new norms will have marginal impact for HDFC as
such income formed only 1% of PBT in 1HFY12. The key risk is large-scale
refinancing of loans, especially in an environment where one/ few players
gets very aggressive. Rise in prepayments may lead to volatility in growth
rates and even ALM issues.
Uniform lending rates- more cons than pros
The regulator has also recommended that HFCs should ensure uniformity of
lending rates to existing and new borrowers with the same risk profile. If
implemented, this would impact spreads as rates for existing borrowers are
generally higher than those for new customers; in some cases the differential
being even +150bps. The only benefit would be that such a regulation would
also deter lenders from poaching customers from other players by offering
lower rates as it would impact the profitability on their existing business. Also
it may be a bit difficult to implement this norm due to higher level of
subjectivity in assessing risk profiles and other operational issues.
HFCs have similar norms to banks
Regulatory norms for HFCs are closely comparable with those for banks (see
fig 1) on risk-weight, LTVs and NPL. One key area where HFCs have a lenient
norm is on standard asset provision on commercial real estate lending– where
banks need to provide 1% versus 0.4% for HFCs. Corporate loans form 35%
of HDFC’s total loans and a hike in provision norm can potentially lead to onetime
provision of ~Rs2.8bn (may be debited to reserves) and recurring
impact of ~1% on earnings
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
New regulatory guidelines
The order to discontinue pre-payment penalty levied by HFCs may have a
nominal (1%) impact on HDFC’s earnings however, lower charges may
influence higher prepayments causing volatility in growth and ALM issues
for lenders. The regulator has also proposed HFCs to charge uniform rates
to existing and new clients, but this may be difficult to implement due to
subjectivity on credit risk and other operational issues. Uniform rates may
hurt spreads but may also deter lenders from poaching clients from peers
by offering lower rates. Key risk is that if competitive environment gets
irrational, growth and earnings impact could be significant.
No pre-payment penalty-low earnings impact, but higher volatility
National Housing Bank (NHB), regulator for housing finance companies (HFC),
has asked then to discontinue levy of pre-payment penalties on housing
loans. RBI also proposes to implement such norms for banks. Currently, HDFC
and most peers charge prepayment penalties in the range of 0.5-2% of
amount prepaid only if it (1) exceeds 25% of outstanding amount in any year,
(2) is made in first 3 years and (3) in few cases, if its not made through own
resources. We believe that new norms will have marginal impact for HDFC as
such income formed only 1% of PBT in 1HFY12. The key risk is large-scale
refinancing of loans, especially in an environment where one/ few players
gets very aggressive. Rise in prepayments may lead to volatility in growth
rates and even ALM issues.
Uniform lending rates- more cons than pros
The regulator has also recommended that HFCs should ensure uniformity of
lending rates to existing and new borrowers with the same risk profile. If
implemented, this would impact spreads as rates for existing borrowers are
generally higher than those for new customers; in some cases the differential
being even +150bps. The only benefit would be that such a regulation would
also deter lenders from poaching customers from other players by offering
lower rates as it would impact the profitability on their existing business. Also
it may be a bit difficult to implement this norm due to higher level of
subjectivity in assessing risk profiles and other operational issues.
HFCs have similar norms to banks
Regulatory norms for HFCs are closely comparable with those for banks (see
fig 1) on risk-weight, LTVs and NPL. One key area where HFCs have a lenient
norm is on standard asset provision on commercial real estate lending– where
banks need to provide 1% versus 0.4% for HFCs. Corporate loans form 35%
of HDFC’s total loans and a hike in provision norm can potentially lead to onetime
provision of ~Rs2.8bn (may be debited to reserves) and recurring
impact of ~1% on earnings
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