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NBFCs
India
Housing Finance: Housing sales weak, competition heats up. We believe the retail
housing finance business will remain under pressure from lower demand and increasing
competitive intensity. Real estate offtake remains weak on the back of high prices even
as potential demand remains strong. Competitive intensity in housing finance is
increasing: private and foreign banks now replace public banks as key challengers on
the turf of housing finance companies. Regulatory changes remain an overhang. We
remain cautious on housing finance, retain REDUCE on HDFC and ADD on LICHF.
Status quo on high real estate prices belie customer hopes, tamp down sales
�� Demand slows down. Our recent real estate conference visits (REIFBS and MCHI) and channel
checks indicate a clear slowdown/moderation in real estate sales. This is largely a metro and/or
high-ticket phenomenon with customers probably deferring purchases due to media reports of
an imminent price correction. Demand in some locations like Bengaluru and many Tier 2 and
Tier 3 cities has held up better, primarily because prices are perceived to be within an affordable
range. However, we expect to see some moderation even in these locations as seen by Ansal
Properties (Rs33, NR) where sales volumes dipped to 2.6 mn sq. ft in 2QFY12 versus 8.5 mn sq.
ft in 1QFY12 and 8 mn sq. ft in 2QFY11.
�� Consumers holding out for better pricing. At the recent MCHI exhibition, we found strong
interest (attendance, queries), suggesting a question of “demand at a price” rather than an
essential lack of demand. This is despite launch and absorption data clearly indicating a
subdued “actual” demand scenario in Mumbai. In Mumbai, we find demand healthy for some
projects (1) mid-low end and outskirts (Boisar, Virar, Kharghar), (2) properties with specific
attractive features (Oberoi Esquire at Goregaon (E) like location and brand, Sunteck at
Goregaon (W) due to attractive pricing, (3) proposed launch by Godrej at Vikhroli due to
developer brand and (4) good demand likely for discount or risk of price increase (Lodha Casa
Rio Gold at Dahisar).
Developers yet to relent on pricing. Developers are maintaining rack rates while select
discounts are available on a discretionary basis. We see no meaningful (>10%) price correction yet.
�� Regulators reduce supply, directly or indirectly. Regulatory risks remain high, leading to
delays in launches in Mumbai and Chennai, this also restricts supply, in turn providing support
to residential prices. At the REIFBS conference, some investors mentioned their view that policy
and regulation is both short term and inconsistent which makes it difficult to evaluate all risks
while investing. India lacks a market for REITs and RMFs which can both attract capital and
make it easier for investors to exit projects.
Competitive intensity heats up again
Will ICICI Bank pose a serious threat, yet again? We find early signals of increasing
competition in the housing finance sector. ICICI Bank seems to back in the mode in setting market
trends: ICICI Bank launched a fix-floating product last month; HDFC followed up with a similar
product after a fortnight. For about three years, ICICI Bank followed HDFC in home loan pricing.
However, in the past two months, ICICI Bank’s home loan rates are marginally (25 bps) below
those of HDFC. At the MHCI exhibition, ICICI Bank offered a further discount of 25 bps on home
loans, while processing fees were also reduced by 50%.
Private and foreign banks most competitive. According to market sources, SBI’s
incremental market share has reduced after the withdrawal of dual-rate (teaser) home loans.
The private and foreign banks appear to offer close competition to housing finance
companies. Most public banks (except SBI) offer home loan rates in the range of 10.75-
12.25% as compared to 10.5-11.5% offered by private banks.; housing finance companies
offer home loans at 10.5-11.75%.
Removal of home loan prepayment rate poses risk to NIM
RBI has indicated that it proposes to remove the pre-payment penalty on home loans. We
believe this will further increase competitive intensity in the housing loan market, thereby
exerting pressure on NIMs. Home loans are currently offered at 10.5-11%, while existing
home loan customers pay upto 12.5%.Housing finance companies report spreads of 2-2.2%,
we estimate that interest spreads on new home loans are close to 0.5-0.75% while existing
home loan portfolios earn 1.25-1.5% more while developer loans earn spread of 4-4.5%.
The removal of pre-payment charges (typically at 2% of loan amount) will likely encourage
existing home loan customers to switch between housing finance companies for better
home loans rates.
Retain Cautious stance on housing finance sector
We retain our REDUCE rating on HDFC. The stock trades at 21X PER and 4X PBR FY2013E.
Lower-than-expected retail demand and likely stress in developer portfolio in the current
environment pose a downside risk to stock.
We retain ADD rating on LICHF on the back of inexpensive valuations and rapid business
traction. The stock trades at 8.1X PER and 1.8XPBR FY2013E for 19% EPS CAGR between
FY2011 and FY2014E and 22-23% medium-term RoE. We expect loan growth to remain
above 20% in FY2012E, though competition in retail home loans and low share of
developer loans will likely keep NIMs under check.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NBFCs
India
Housing Finance: Housing sales weak, competition heats up. We believe the retail
housing finance business will remain under pressure from lower demand and increasing
competitive intensity. Real estate offtake remains weak on the back of high prices even
as potential demand remains strong. Competitive intensity in housing finance is
increasing: private and foreign banks now replace public banks as key challengers on
the turf of housing finance companies. Regulatory changes remain an overhang. We
remain cautious on housing finance, retain REDUCE on HDFC and ADD on LICHF.
Status quo on high real estate prices belie customer hopes, tamp down sales
�� Demand slows down. Our recent real estate conference visits (REIFBS and MCHI) and channel
checks indicate a clear slowdown/moderation in real estate sales. This is largely a metro and/or
high-ticket phenomenon with customers probably deferring purchases due to media reports of
an imminent price correction. Demand in some locations like Bengaluru and many Tier 2 and
Tier 3 cities has held up better, primarily because prices are perceived to be within an affordable
range. However, we expect to see some moderation even in these locations as seen by Ansal
Properties (Rs33, NR) where sales volumes dipped to 2.6 mn sq. ft in 2QFY12 versus 8.5 mn sq.
ft in 1QFY12 and 8 mn sq. ft in 2QFY11.
�� Consumers holding out for better pricing. At the recent MCHI exhibition, we found strong
interest (attendance, queries), suggesting a question of “demand at a price” rather than an
essential lack of demand. This is despite launch and absorption data clearly indicating a
subdued “actual” demand scenario in Mumbai. In Mumbai, we find demand healthy for some
projects (1) mid-low end and outskirts (Boisar, Virar, Kharghar), (2) properties with specific
attractive features (Oberoi Esquire at Goregaon (E) like location and brand, Sunteck at
Goregaon (W) due to attractive pricing, (3) proposed launch by Godrej at Vikhroli due to
developer brand and (4) good demand likely for discount or risk of price increase (Lodha Casa
Rio Gold at Dahisar).
Developers yet to relent on pricing. Developers are maintaining rack rates while select
discounts are available on a discretionary basis. We see no meaningful (>10%) price correction yet.
�� Regulators reduce supply, directly or indirectly. Regulatory risks remain high, leading to
delays in launches in Mumbai and Chennai, this also restricts supply, in turn providing support
to residential prices. At the REIFBS conference, some investors mentioned their view that policy
and regulation is both short term and inconsistent which makes it difficult to evaluate all risks
while investing. India lacks a market for REITs and RMFs which can both attract capital and
make it easier for investors to exit projects.
Competitive intensity heats up again
Will ICICI Bank pose a serious threat, yet again? We find early signals of increasing
competition in the housing finance sector. ICICI Bank seems to back in the mode in setting market
trends: ICICI Bank launched a fix-floating product last month; HDFC followed up with a similar
product after a fortnight. For about three years, ICICI Bank followed HDFC in home loan pricing.
However, in the past two months, ICICI Bank’s home loan rates are marginally (25 bps) below
those of HDFC. At the MHCI exhibition, ICICI Bank offered a further discount of 25 bps on home
loans, while processing fees were also reduced by 50%.
Private and foreign banks most competitive. According to market sources, SBI’s
incremental market share has reduced after the withdrawal of dual-rate (teaser) home loans.
The private and foreign banks appear to offer close competition to housing finance
companies. Most public banks (except SBI) offer home loan rates in the range of 10.75-
12.25% as compared to 10.5-11.5% offered by private banks.; housing finance companies
offer home loans at 10.5-11.75%.
Removal of home loan prepayment rate poses risk to NIM
RBI has indicated that it proposes to remove the pre-payment penalty on home loans. We
believe this will further increase competitive intensity in the housing loan market, thereby
exerting pressure on NIMs. Home loans are currently offered at 10.5-11%, while existing
home loan customers pay upto 12.5%.Housing finance companies report spreads of 2-2.2%,
we estimate that interest spreads on new home loans are close to 0.5-0.75% while existing
home loan portfolios earn 1.25-1.5% more while developer loans earn spread of 4-4.5%.
The removal of pre-payment charges (typically at 2% of loan amount) will likely encourage
existing home loan customers to switch between housing finance companies for better
home loans rates.
Retain Cautious stance on housing finance sector
We retain our REDUCE rating on HDFC. The stock trades at 21X PER and 4X PBR FY2013E.
Lower-than-expected retail demand and likely stress in developer portfolio in the current
environment pose a downside risk to stock.
We retain ADD rating on LICHF on the back of inexpensive valuations and rapid business
traction. The stock trades at 8.1X PER and 1.8XPBR FY2013E for 19% EPS CAGR between
FY2011 and FY2014E and 22-23% medium-term RoE. We expect loan growth to remain
above 20% in FY2012E, though competition in retail home loans and low share of
developer loans will likely keep NIMs under check.
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