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HDFC has corrected by ~4% today on two NHB circulars a) banning
prepayment fees on floating rate loans and b) asking housing finance
companies to offer the same rates to existing and new borrowers (the
current differential is 50-75bp). Our take, after some clarifications with
HFC managements, is that the market has over-reacted. We don't think it
will significantly impact pricing power or portfolio stability. Our key
thoughts:
HDFC already offers borrowers the option to switch to the new rate for a
fee - that should be compliant with the NHB circular. The wording of
the NHB circular on uniform pricing is not specific in many ways.
Prepayment fees are very minuscule (a small subset of overall fees,
which are ~6% of 1H PBT) so the financial impact of prepayment fee
abolition is small.
The bigger risk is that the abolition of prepayment fees could accelerate
switching. Our view is that it is a risk (though the uniform rate circular
limits that scope) but that would work in all directions. From HDFC’s
perspective, there are no players who have the cost base to undercut
them, in our view, so the net risk is minimal.
We note that the incentive to switch already exists (the fees are a mere
~20bp annualized) – so the abolition of the fees are unlikely to accelerate
lender-swapping significantly. HDFC’s brand (and service quality) is
also an edge – we think it definitely gives them an advantage.
Over time, it is probably inevitable that the spread between existing and
new borrowers will narrow (though not disappear), but the absolute rates
should move up to counter that.
HDFC’s dominant position comes from being a cost leader (both opex
and credit costs) and we think competitors will find it difficult to break
that dominance. We see today’s stock correction as an over-reaction,
and believe it is an entry opportunity into a high quality stock.
Maintain OW – the stock stays a top pick.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC has corrected by ~4% today on two NHB circulars a) banning
prepayment fees on floating rate loans and b) asking housing finance
companies to offer the same rates to existing and new borrowers (the
current differential is 50-75bp). Our take, after some clarifications with
HFC managements, is that the market has over-reacted. We don't think it
will significantly impact pricing power or portfolio stability. Our key
thoughts:
HDFC already offers borrowers the option to switch to the new rate for a
fee - that should be compliant with the NHB circular. The wording of
the NHB circular on uniform pricing is not specific in many ways.
Prepayment fees are very minuscule (a small subset of overall fees,
which are ~6% of 1H PBT) so the financial impact of prepayment fee
abolition is small.
The bigger risk is that the abolition of prepayment fees could accelerate
switching. Our view is that it is a risk (though the uniform rate circular
limits that scope) but that would work in all directions. From HDFC’s
perspective, there are no players who have the cost base to undercut
them, in our view, so the net risk is minimal.
We note that the incentive to switch already exists (the fees are a mere
~20bp annualized) – so the abolition of the fees are unlikely to accelerate
lender-swapping significantly. HDFC’s brand (and service quality) is
also an edge – we think it definitely gives them an advantage.
Over time, it is probably inevitable that the spread between existing and
new borrowers will narrow (though not disappear), but the absolute rates
should move up to counter that.
HDFC’s dominant position comes from being a cost leader (both opex
and credit costs) and we think competitors will find it difficult to break
that dominance. We see today’s stock correction as an over-reaction,
and believe it is an entry opportunity into a high quality stock.
Maintain OW – the stock stays a top pick.
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