Housing Finance Companies

Fo

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Housing Finance Companies Will they Continue to Chart a Steady Course?

Financial Sector Ratings, CRISIL

May 2014

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CRISIL’s Ratings Cover Almost 90% of HFC Advances

21 CRISIL-Rated HFCs

Total Advances Rs. 4.1 lakh crore

Rs. 3.8 lakh crore

Rs. 0.5 lakh crore

Sector advances as on March 31, 2014- Rs.4.6 lakh crore

Total Debt

Net worth

Source- CRISIL estimates

2

Retail Housing: Rs. 3.0 lakh crore

Retail LAP: Rs. 0.3 lakh crore

Non-retail Housing: Rs. 0.8 lakh crore

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Key Messages

Competition in mortgage finance sector is intensifying

– Increasing focus on the mortgage finance segment by banks and NBFCs

– Competition and fall in home sales to lead to HFCs growth declining to ~17% in 2014-15

– However, HFCs will be able to maintain their share in retail housing

– Total assets of HFCs to cross Rs.5 lakh crore, overtaking retail NBFCs

Asset quality to remain healthy with gross NPA of 0.75% by March 2015

– CRISIL-rated MBS pools indicate robust performance in retail housing

– Slowing growth in non-housing reflects potential risks

Profitability of HFCs to remain comfortable with RoA of 2.2% in 2014-15

– A well-diversified resource mix with significant market borrowings supports the profitability of HFCs

Regulatory initiatives taken have strengthened the sector

Industry structure remains concentrated; emergence of mid-sized HFCs in recent

years

– Growing at a faster pace, mid-sized HFCs will constitute ~10% of industry by March 2015

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Competition in the Mortgage Finance Sector

is Intensifying

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Increased Focus by Banks on Retail Housing

Outstanding retail housing portfolio- Banks + HFCs

20.0

14.2

11.3

14.6

18.4 18.0

20.8 21.7

19.2

26.9

19.8 18.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 (P)

(Gro

wth

%)

Mark

et

Sh

are

HFCs Banks Banks-Growth (RHS) HFCs-Growth (RHS)

Banks growth rate in retail housing is expected to be in line with HFCs

HFCs will maintain their share in this segment

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CRISIL Estimates

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Banks and NBFCs Pose Stiff Competition

in Non-Housing

Growth in retail LAP portfolio


Growth in non-retail* portfolio

20.1 28.9

17.7

15.7

12.2

-0.3

5.8 15.6

11.9

22.4

-10.0

0.0

10.0

20.0

30.0

2010 2011 2012 2013 2014

(%)

As on March 31

HFCs-Growth in non-retail Banks- Growth in CRE

NBFCs have a meaningful position in LAP; their portfolio is ~2X of HFCs LAP portfolio

Banks’ commercial real estate (CRE) exposure is substantial, ~2X of HFCs non-retail portfolio

*Non-retail = LRD + construction finance + corporate loans

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HFC Growth to Decline to Around 17% in 2014-15

Growth in overall advances

2.0 2.5

3.0

3.9 4.6

5.4

16.1

20.9 21.8

24.0*

19.0

17.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2010 2011 2012 2013 2014 2015 (P)

(%)

Rs.

lakh

cro

res

Outstanding Advances Growth in advances

Source- NHB, CRISIL estimates

* Adjusted for mergers

Increased competition, coupled with fall in home loan sales, to lead to a further decline in growth

LAP segment to continue to grow; developer finance to remain relatively subdued

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Asset Quality to Remain Healthy

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Cumulative Collections Ratio in MBS

(Retail Housing Loan) Pools Remain Robust

Source: CRISIL analysis

Data as of December 2013 payouts

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Overdues in MBS Pools Remain Low

Source: CRISIL analysis

Data as of December 2013 payouts

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Slowing Growth in Non-Housing Reflects

Potential Risks

Source- CRISIL estimates based on top 10 HFCs; excludes NBFC LAP portfolio

Slowdown witnessed in the non-retail portfolio

20.1

28.9

17.7 15.7

12.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2010 2011 2012 2013 2014

(%)

For the year ended March 31

Growth in portfolio

CRE segment remains vulnerable

‒ Bookings continue to decline; inventory

build-up outpacing growth in customer

advances

‒ Rising project costs putting pressure on

margins

Moderation in growth in the retail LAP

Risks currently not reflected in Gross NPAs

‒ Gross NPAs sub 0.5%

However, LTVs have increased to ~60%

from 40-45% earlier

‒ Potential risk in case continued economic

slow down, and any fall in asset prices

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Overall Asset Quality to Remain Healthy

Trend in Gross NPAs

0.92

0.75

0.70 0.72 0.75 0.75

1.36

1.22

1.14 1.13 1.13 1.1

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2010 2011 2012 2013 2014 2015 (P)

(%)

As on March 31

GNPA 2-year lagged GNPA


Potential risk in retail housing – significant job losses and/or property price corrections

‒ However, data does not show any signs of weakening yet

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Profitability to Remain Comfortable

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A Well-Diversified Resource Mix Supports Profitability

Trend in borrowing mix

36.4 39.6 41.5 45.9 48.0

36.2

40.2 36.9 27.7 29.1

15.6

12.8 15.3 18.2

17.5

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014

Bonds/NCDs Bank borrowings Deposits NHB refinance CP Others


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Rising Share of HFCs in Bond Issuances

Growth in bond issuances

16.7

27.4

35.1

55.6 58.8 8.8

14.3 14.0

15.8

22.2

0.0

5.0

10.0

15.0

20.0

25.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2010 2011 2012 2013 2014

(%)

Rs.

‘000 c

rore

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HFCs- Bond Issuance HFCs- Share in total bond issuance

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Profitability to Remain Steady in 2014-15


Trend in RoA

3.1 3.2

2.8 2.8 2.9 2.9

0.6 0.6 0.6 0.5 0.6 0.6

2.3 2.4

2.2 2.2 2.2 2.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015 (P)

For the year ended

Net Interest Margin Opex Ratio Return on Assets

NIMs to remain steady; no material increase expected in credit costs

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Regulatory Initiatives have Strengthened the Sector

Emerging business in mortgage guarantee market to widen addressable

segment

– First transaction concluded recently

Setting up of the Credit Risk Guarantee Fund for promotion of low income

and affordable housing

USD 1 billion annual ECB window for low-cost housing

Setting up of CERSAI gradually reduces risk of multiple loans against same

property

– However, use needs to be more widespread

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However, deepening the resource base to remain a focus area

– Securitization market for mortgages not as developed as for other asset classes

– Need to evaluate innovative tools such as covered bonds

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Emergence of Mid-Sized HFCs

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Large HFCs

(Advances > Rs.0.25 lakh crore)

Total Advances Rs. 3.7 lakh crore

Rs. 3.4 lakh crore

Rs. 0.5 lakh crore

Total Debt

Net worth

Mid-sized HFCs

(Advances > Rs.0.05 lakh crore)

Rs. 0.4 lakh crore

Rs. 0.4 lakh crore

Rs. 0.04 lakh crore

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Mid-size HFCs have Differentiated themselves from

Large HFCs

Small size and higher growth

1

Higher cost of borrowing + high

competition

2

Strategies to offset this: Focus on higher yielding asset segments

3

Higher Gross NPAs compared to large

HFCs

4

Higher NIMs enable management of higher opex & credit costs

5

Leading to RoAs similar to large

HFCs

6

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Rapid Growth in Recent Years

Growth in advances

19.1

33.5

35.6

45.2

34.1

22.8 29.4 24.7

23.6

17.1

0.0

10.0

20.0

30.0

40.0

50.0

2010 2011 2012 2013 2014

(%)

As on March 31

Mid-Size HFCs Large HFCs

Attractiveness of the sector has invited new entrants in recent years

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Large HFCs


1


competition

2


3


HFCs

4


5


HFCs

6

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Higher Borrowing Cost Given Limited Ability

to Tap Bond Market

Borrowing mix- Large HFCs vs Mid-sized HFCs (March 31, 2014)

Bonds/ NCDs

Bank Borrowings

Deposits

NHB Refinance

Commercial Paper

Others

51.0%

27.7%

18.5%

1.4%

1.2%

0.2%

Large HFCs Mid-sized HFCs


Mid-sized HFCs have greater reliance on bank borrowings and NHB refinance

Needed to develop strategies to offset this higher cost

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Large HFCs


1


competition

2


3


HFCs

4


5


HFCs

6

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Strategy 1: Focus on Self-Employed

Segment in Housing

Customer Profile- Housing Loans (March 31, 2014)

Salaried Others



Mid-sized HFCs have a larger proportion of high-yielding self-employed borrowers

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Strategy 2: Grow the Non-Housing Portfolio


Portfolio composition- Large HFCs Portfolio composition- Mid-sized HFCs

Increasing proportion of LAP in mid-sized HFCs

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Non Housing Non Housing

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Limited Ability to Serve the Builder Segment

Composition - Non-housing portfolio (March 31, 2014)

Builder/Corporate loans Loans against Property Rental discounting Others



Balance sheet size of mid sized HFCs limits the ability to take large exposures

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Large HFCs


1


competition

2


3


HFCs

4


5


HFCs

6

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Choice of Asset Segment Leads to Higher GNPA


Trend in Gross NPA

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012 2013 2014

(%)


GNPA- Large GNPA-Mid-sized 2-year lagged GNPA- Large 2-year lagged GNPA- Mid-sized

0.82 0.68 0.66 0.69 0.73

1.72

1.32

0.99

0.85 0.83

1.23 1.13

1.06 1.06 1.07

2.37

2.12

1.81 1.66

1.62

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Large HFCs


1


competition

2


3


HFCs

4


5


HFCs

6

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Higher Net Interest Margin Offset by higher opex

Large HFCs

Mid-sized HFCs

Higher NIMs Enable Management of Higher Opex and

Credit Costs


3.1% 3.2% 2.8% 2.8% 2.8%

3.6% 3.7% 3.6% 3.5% 3.5%

2010 2011 2012 2013 2014


And higher credit costs

0.2% 0.3%

0.2% 0.1% 0.1%

0.2%

0.5%

0.3% 0.3% 0.4%

2010 2011 2012 2013 2014


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Large HFCs


1


competition

2


3


HFCs

4


5


HFCs

6

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Resulting in Profitability Broadly in Line with

Large HFCs


Trend in RoA

2.3% 2.3% 2.2% 2.2% 2.2%

2.3% 2.3% 2.1%

2.0% 2.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2010 2011 2012 2013 2014



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CRISIL Limited

www.crisil.com

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Housing Finance Companies

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Transcript of Housing Finance Companies