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HDFC
Scrapping of pre-payment penalties is
negative
Event
What has happened? The housing finance regulator, NHB, yesterday issued a
notice to all housing finance companies, asking them:
(i) To scrap pre-payment penalties on all floating rate home loans. It has also
asked them to scrap pre-payment penalties on fixed rate home loans if the
borrower is pre-paying using his own fund sources. However if the borrower is
doing a loan transfer from one bank to another in case of fixed rate loans, the
penalties remain. In case of violation, NHB will take penal action.
(ii) To ensure the rates charged to old and new customers/borrowers are
uniform irrespective of when the loan was taken. Note that this diktat is more
in the form of advisory and did not talk of any penal action in case of violation.
Impact
Will encourage loan transfers: The high pre-payment rates usually charged
by companies like HDFC Ltd have acted as a deterrent to switching loans
from one company to another. However with the abolishment of pre-payment
charges, there could be loan transfers that could negatively affect in 2 ways:
1) loan book growth could slow; and 2) ALM management would be difficult.
What will be the financial impact? Usually the pre-payment charges are
between 1% and 4% of the outstanding loan amount. HDFC Ltd, during the
time when SBI launched the teaser loan products, used to charge as much as
3-4% in order to discourage borrowers from switching over. Under normal
circumstances pre-payments are not more than 20% of the outstanding loan
amount per year and most housing finance companies allow that without any
pre-payment penalties. So the financial impact on an immediate term basis is
unlikely to be high in our view. HDFC Ltd management clarified that the prepayment
penalty fees per quarter are around Rs300mn, which is roughly 2%
of earnings. The management didn’t give us an estimate as to what could be
the impact if rates were to be aligned for old as well as new customers.
Are banks affected by this? Note that this circular is issued by NHB, the
housing finance regulator. RBI has talked in several forums about
abolishment of pre-payment charges but hasn’t issued an official notice as of
now. However we believe it’s just a matter of time and even banks will have to
follow this. Most PSU banks don’t have any pre-payment penalties on their
housing loans. Private Banks do have pre-payment penalties of around 2-3%.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs775.00 based on a Sum of Parts methodology.
Catalyst: steady loan growth and margins
Action and recommendation
It’s difficult to quantify the impact of the above regulatory changes as we need
to wait and see how the mortgage market would change post the above
guidelines. There could be predatory pricing by banks especially PSUs (for eg
SBI’s teaser loan scheme) in times of excess liquidity which could affect
growth for institutions like HDFC Ltd. ALM management would be more
difficult, thereby making spreads volatile and there could be some impact on
spreads if rates were to be aligned for new and old customers. Nevertheless
the way we look at this is that the high multiple accorded by the market to
HDFC Ltd is likely to come down over a period of time and the stock could get
structurally de-rated.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HDFC
Scrapping of pre-payment penalties is
negative
Event
What has happened? The housing finance regulator, NHB, yesterday issued a
notice to all housing finance companies, asking them:
(i) To scrap pre-payment penalties on all floating rate home loans. It has also
asked them to scrap pre-payment penalties on fixed rate home loans if the
borrower is pre-paying using his own fund sources. However if the borrower is
doing a loan transfer from one bank to another in case of fixed rate loans, the
penalties remain. In case of violation, NHB will take penal action.
(ii) To ensure the rates charged to old and new customers/borrowers are
uniform irrespective of when the loan was taken. Note that this diktat is more
in the form of advisory and did not talk of any penal action in case of violation.
Impact
Will encourage loan transfers: The high pre-payment rates usually charged
by companies like HDFC Ltd have acted as a deterrent to switching loans
from one company to another. However with the abolishment of pre-payment
charges, there could be loan transfers that could negatively affect in 2 ways:
1) loan book growth could slow; and 2) ALM management would be difficult.
What will be the financial impact? Usually the pre-payment charges are
between 1% and 4% of the outstanding loan amount. HDFC Ltd, during the
time when SBI launched the teaser loan products, used to charge as much as
3-4% in order to discourage borrowers from switching over. Under normal
circumstances pre-payments are not more than 20% of the outstanding loan
amount per year and most housing finance companies allow that without any
pre-payment penalties. So the financial impact on an immediate term basis is
unlikely to be high in our view. HDFC Ltd management clarified that the prepayment
penalty fees per quarter are around Rs300mn, which is roughly 2%
of earnings. The management didn’t give us an estimate as to what could be
the impact if rates were to be aligned for old as well as new customers.
Are banks affected by this? Note that this circular is issued by NHB, the
housing finance regulator. RBI has talked in several forums about
abolishment of pre-payment charges but hasn’t issued an official notice as of
now. However we believe it’s just a matter of time and even banks will have to
follow this. Most PSU banks don’t have any pre-payment penalties on their
housing loans. Private Banks do have pre-payment penalties of around 2-3%.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs775.00 based on a Sum of Parts methodology.
Catalyst: steady loan growth and margins
Action and recommendation
It’s difficult to quantify the impact of the above regulatory changes as we need
to wait and see how the mortgage market would change post the above
guidelines. There could be predatory pricing by banks especially PSUs (for eg
SBI’s teaser loan scheme) in times of excess liquidity which could affect
growth for institutions like HDFC Ltd. ALM management would be more
difficult, thereby making spreads volatile and there could be some impact on
spreads if rates were to be aligned for new and old customers. Nevertheless
the way we look at this is that the high multiple accorded by the market to
HDFC Ltd is likely to come down over a period of time and the stock could get
structurally de-rated.
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