Mortgage Finance - Making Inroads in Unchartered Territory; Sector Update :: Edelweiss

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"The only thing constant in life is change". This seems all the more true in case of the mortgage finance industry, which has been continuously evolving every decade. Over the next few years, we foresee metamorphosis in the mortgage finance industry`s dynamics propelled by new growth catalysts, both in terms of customer segments and geographical presence. We anticipate humungous growth opportunities in the highly under-served self employed and LAP segments. Geographically, the next leg of growth will come from footprint expansion into Rajasthan, Madhya Pradesh, Uttar Pradesh, Chattisgarh and West Bengal. These potent catalysts will be further bolstered by structural growth drivers including the government and regulatory incentives. We prefer players with niche presence in tier II/III cities underpinned by optimal product mix who can cash on and build scale in emerging growth segments.

Mortgage finance industry: Changing dynamics to engineer metamorphosis

The mortgage finance space has been continuously evolving every decade. Few prominent characteristics that marked 2003-14 were: (a) over serviced salaried segment triggering high competition; (b) banks` incremental focus on retail products (particularly mortgages) feeding into aggressive pricing; (c) waiver of prepayment penalty narrowing lending rate differential between financiers (less than 50bps); and (d) largely concentrated lending by mortgage financiers-top-3 states constitute >50% and top-3 cities within each state contribute >60%.

We presage metamorphosis in the mortgage finance industry`s dynamics over the next few years, propelled by new growth catalysts, both in terms of customer segments and geographical presence. We anticipate humungous opportunity in the self employed and LAP segments as the former constitutes >50% of India`s workforce, but is largely under-served as only a handful housing finance companies (HFCs) cater to them, that too on regional basis. Moreover, our in-depth analysis of various states employing judicious selection of socio-economic factors, housing distribution combined with competitive landscape  indicates that Rajasthan, Madhya Pradesh, Uttar Pradesh, Chattisgarh and West Bengal offer immense potential. The next leg of growth will come from footprint expansion into these geographies. In addition, there will be further deeper penetration in lucrative markets like Gujarat, Tamil Nadu and Andhra Pradesh. These potent catalysts will be bolstered by structural growth drivers like government/regulatory incentives viz., housing for all by 2022, development of 100 smart cities, viability gap funding and National Housing Bank (NHB) refinancing window, amongst others.

Players with niche presence in tier II/III cities with optimal product mix to ace the game

There is clear visibility on improved and sustainable return profiles given the new growth hormones, in-place margin triggers, lean operating cost structures and structural safe asset classes. With absence of switching costs, cost advantage becomes a critical determinant in housing finance. By virtue of our optimism on emerging growth opportunities in the housing finance space, we anticipate all mortgage financiers to at least sustain their valuation multiples, if not improve them further. We prefer players with niche presence in tier II/III cities underpinned by optimal product mix, who can cash on and build scale in emerging growth segments.

LINK
https://www.edelweiss.in/research/Mortgage-Finance--Making-Inroads-in-Unchartered-Territory;-Sector-Update/27998.html