India - Housing Finance - Undeterred by rough seas ::Emkay,

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India - Housing Finance

Undeterred by rough seas

The Indian housing mortgage industry is on a strong footing, given the immense growth potential and its ability to weather flip flops in the real estate sector. Our confidence stems from the resilience exhibited during the global downturn of 2007-09. Through enhanced risk management systems and effective standards, the regulator has mitigated the risk of any severe impact on the housing finance sector. While the mortgage industry witnessed slower growth during the crisis period, (11% CAGR during FY08-10), its asset quality remained largely intact. Mortgage/GDP in India is a meager 10%* and with improving demographics and economies of scale, we believe there is room for growth.

We are positive on the mortgage industry from a medium to long term perspective and prefer housing finance companies over banks in this space. The recent NHB regulation on withdrawal of pre-payment penalty and uniformity in interest rates on floating loan is unlikely to have any material impact on growth and profitability. Also, interest rates and property prices, albeit a detriment, have had minimal impact on growth. 

We initiate coverage on Dewan Housing Finance (BUY) and HDFC (HOLD). Maintain BUY rating on LICHF. Dewan Housing, through both organic and inorganic growth, is well placed to cater to mortgage needs of customer across different income levels and geographies. We expect the conso. entity to report healthy 33% CAGR in loan portfolio over FY11-13E. HDFC, the mortgage giant, with healthy loan mix, adequate borrowing profile and stable spread is set to clock 18%/15% CAGR in loan/balance sheet. LICHF, through relentless efforts towards loan growth, NPA management and further penetration into smaller cities is set to witness 26% CAGR in loan portfolio. 

Conducive growth environment given strong demand drivers

Indian mortgage industry is characterized by its a) customer’s profile and his mortgage needs b) his behavior to interest rate regime and property prices c) asset quality and d) timely government and regulatory intervention. Increasing income levels with improved affordability, urbanization including emergence of tier-II and tier-III cities, availability of finance and tax incentives have all attributed for rise in housing mortgage in the past.

Improving demographics + stringent regulations to ensure steady growth

Mortgage penetration in India is at a nascent stage and given favorable demographics with improving economies of scale, we believe there is enough room for penetration. Further, timely intervention by the regulator towards capital requirement, provisioning and risk weights has ensured stable balance sheet growth with comfortable asset quality. The recent move towards removal of pre-payment penalty clause and uniformity in interest rates, in our view will have minimal impact on HFC’s profitability and growth.

HFCs better placed than its peers – Banks & NBFCs

The dominance of HFCs’/Banks’ in the mortgage space has been a debatable topic in the past. In our view, HFCs stand at gain given the resilience exhibited on both growth and profitability front. Mono-line business with domain expertise, lower operational cost and ALM portfolio remain key +ves. Even when compared on asset quality front, HFCs GNPA at ~1% has remained far too superior to its peers - SBI Q2FY12 housing GNPA at 2.4%. When compared to other NBFC’s, housing finance companies have outpaced its peers on their ability to deliver balance sheet growth with healthy return ratios.

Valuation and view

HFCs have outperformed its peers on expectations of a) stable balance sheet growth b) adequate capital c) comfortable asset quality and d) superior return ratios. Mortgage penetration in India is at a nascent stage and given strong demand drivers with favorable demographics, we believe there is immense potential for penetration and growth. We expect the mortgage industry to witness steady 15% CAGR over FY11-15E and the ratio of mortgage/GDP to inch towards 13% (+300bps) by end-FY15E.