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UBS Investment Research
India Banking & Finance Sector
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Event: National Housing Bank (NHB) introduces two new changes
NHB has introduced two new guideline changes wherein: 1) HFCs (Housing
finance companies) are advised to treat all old and new customers (who have
similar credit/risk profile) with uniform interest rates; 2) HFCs have been directed
not to levy penalty charges on pre-closure of housing loans. When loans are on
floating basis (which is nearly 70% of housing loans) preclosure can be done
through any means without any penalty. Fixed rate loans are allowed to be repaid
without any penalty only if financed through own sources. RBI is likely to issue
similar guidelines for banks in coming weeks.
Impact: Competition to increase; however lenders sanguine on impact
In our view there exists a ~150 bps difference between rates charged between new
and old customers. We believe this guideline will effectively drive new mortgage
rates upwards which could hurt demand. Our interaction with lenders suggests
limited impact of guideline changes; HDFC expects market share gains due to
refinancing opportunities at expense of others. Direct revenue impact due to
removal of pre payment penalty should be <2% as fee income comprises of 2-3%
of operating income for HDFC and LICH and bulk of it is loan processing fees.
Action: Maintain Sell on LICH and Neutral on HDFC
For LICH rising headwinds in the form of rising competition, low Tier-1, low
provisions for operating profit, and slowdown in real estate activity tilt the risk
reward unfavourable considering the valuation of 2x FY12E book. We maintain
our Sell rating on LICH with PT of Rs200. We maintain Neutral rating on HDFC
due to rich valuations with PT of Rs775.
Table 1: Impact of the new guideline
Guideline Impact
Uniformity in charging interest (floating rate basis) for old and
new customers
We believe a ~150bps difference between rates charged between new and old
customers. This guideline will effectively drive up new mortgage rates which could
hurt demand.
Removal of Pre-payment Penalty on Pre-closure of housing
loans
Direct revenue impact should be less than 2% as fee income comprises 2-3% of
operating income for HDFC and LICH and bulk of it is loan processing fees
Source: National Housing Bank, UBS
Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit, increase NPL risk,
impact fee income, and exert pressure on NIM.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Banking & Finance Sector
L oans portable now free of charge
Event: National Housing Bank (NHB) introduces two new changes
NHB has introduced two new guideline changes wherein: 1) HFCs (Housing
finance companies) are advised to treat all old and new customers (who have
similar credit/risk profile) with uniform interest rates; 2) HFCs have been directed
not to levy penalty charges on pre-closure of housing loans. When loans are on
floating basis (which is nearly 70% of housing loans) preclosure can be done
through any means without any penalty. Fixed rate loans are allowed to be repaid
without any penalty only if financed through own sources. RBI is likely to issue
similar guidelines for banks in coming weeks.
Impact: Competition to increase; however lenders sanguine on impact
In our view there exists a ~150 bps difference between rates charged between new
and old customers. We believe this guideline will effectively drive new mortgage
rates upwards which could hurt demand. Our interaction with lenders suggests
limited impact of guideline changes; HDFC expects market share gains due to
refinancing opportunities at expense of others. Direct revenue impact due to
removal of pre payment penalty should be <2% as fee income comprises of 2-3%
of operating income for HDFC and LICH and bulk of it is loan processing fees.
Action: Maintain Sell on LICH and Neutral on HDFC
For LICH rising headwinds in the form of rising competition, low Tier-1, low
provisions for operating profit, and slowdown in real estate activity tilt the risk
reward unfavourable considering the valuation of 2x FY12E book. We maintain
our Sell rating on LICH with PT of Rs200. We maintain Neutral rating on HDFC
due to rich valuations with PT of Rs775.
Table 1: Impact of the new guideline
Guideline Impact
Uniformity in charging interest (floating rate basis) for old and
new customers
We believe a ~150bps difference between rates charged between new and old
customers. This guideline will effectively drive up new mortgage rates which could
hurt demand.
Removal of Pre-payment Penalty on Pre-closure of housing
loans
Direct revenue impact should be less than 2% as fee income comprises 2-3% of
operating income for HDFC and LICH and bulk of it is loan processing fees
Source: National Housing Bank, UBS
Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit, increase NPL risk,
impact fee income, and exert pressure on NIM.
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