Housing Finance Companies

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Housing Finance Companies: Will they continue to Chart a Steady Course? See a CRISIL Ratings presentation.

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Housing Finance Companies

  1. 1. ForInternalUseOnly–NotForExternalDistribution©2014CRIISILLtd.Allrightsreserved. Housing Finance Companies Will they Continue to Chart a Steady Course? Financial Sector Ratings, CRISIL May 2014
  2. 2. ©2014CRIISILLtd.Allrightsreserved. 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
  3. 3. ©2014CRIISILLtd.Allrightsreserved. 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 3
  4. 4. ©2014CRIISILLtd.Allrightsreserved. Competition in the Mortgage Finance Sector is Intensifying 4
  5. 5. ©2014CRIISILLtd.Allrightsreserved. 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) (Growth%) MarketShare 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 5 CRISIL Estimates
  6. 6. ©2014CRIISILLtd.Allrightsreserved. Banks and NBFCs Pose Stiff Competition in Non-Housing Growth in retail LAP portfolio Source- CRISIL estimates 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 6
  7. 7. ©2014CRIISILLtd.Allrightsreserved. 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.lakhcrores 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 7
  8. 8. ©2014CRIISILLtd.Allrightsreserved. Asset Quality to Remain Healthy 8
  9. 9. ©2014CRIISILLtd.Allrightsreserved. Cumulative Collections Ratio in MBS (Retail Housing Loan) Pools Remain Robust Source: CRISIL analysis Data as of December 2013 payouts 9
  10. 10. ©2014CRIISILLtd.Allrightsreserved. Overdues in MBS Pools Remain Low Source: CRISIL analysis Data as of December 2013 payouts 10
  11. 11. ©2014CRIISILLtd.Allrightsreserved. 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 11
  12. 12. ©2014CRIISILLtd.Allrightsreserved. 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 Source- CRISIL estimates  Potential risk in retail housing – significant job losses and/or property price corrections ‒ However, data does not show any signs of weakening yet 12
  13. 13. ©2014CRIISILLtd.Allrightsreserved. Profitability to Remain Comfortable 13
  14. 14. ©2014CRIISILLtd.Allrightsreserved. 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 Source- CRISIL estimates 14
  15. 15. ©2014CRIISILLtd.Allrightsreserved. Rising Share of HFCs in Bond Issuances Growth in bond issuances 16.7 27.4 35.1 55.6 58.88.8 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.‘000crores For the year ended March 31 HFCs- Bond Issuance HFCs- Share in total bond issuance 15
  16. 16. ©2014CRIISILLtd.Allrightsreserved. Profitability to Remain Steady in 2014-15 Source- CRISIL estimates 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 16
  17. 17. ©2014CRIISILLtd.Allrightsreserved. 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 17 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
  18. 18. ©2014CRIISILLtd.Allrightsreserved. Emergence of Mid-Sized HFCs 18 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
  19. 19. ©2014CRIISILLtd.Allrightsreserved. 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 19
  20. 20. ©2014CRIISILLtd.Allrightsreserved. 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 20
  21. 21. ©2014CRIISILLtd.Allrightsreserved. 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 21
  22. 22. ©2014CRIISILLtd.Allrightsreserved. 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 Source- CRISIL estimates  Mid-sized HFCs have greater reliance on bank borrowings and NHB refinance  Needed to develop strategies to offset this higher cost 22
  23. 23. ©2014CRIISILLtd.Allrightsreserved. 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 23
  24. 24. ©2014CRIISILLtd.Allrightsreserved. Strategy 1: Focus on Self-Employed Segment in Housing Customer Profile- Housing Loans (March 31, 2014) Salaried Others Large HFCs Mid-sized HFCs Source- CRISIL estimates  Mid-sized HFCs have a larger proportion of high-yielding self-employed borrowers 24
  25. 25. ©2014CRIISILLtd.Allrightsreserved. Strategy 2: Grow the Non-Housing Portfolio Source- CRISIL estimates Portfolio composition- Large HFCs Portfolio composition- Mid-sized HFCs  Increasing proportion of LAP in mid-sized HFCs 25 Non Housing Non Housing
  26. 26. ©2014CRIISILLtd.Allrightsreserved. Limited Ability to Serve the Builder Segment Composition - Non-housing portfolio (March 31, 2014) Builder/Corporate loans Loans against Property Rental discounting Others Large HFCs Mid-sized HFCs Source- CRISIL estimates  Balance sheet size of mid sized HFCs limits the ability to take large exposures 26
  27. 27. ©2014CRIISILLtd.Allrightsreserved. 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 27
  28. 28. ©2014CRIISILLtd.Allrightsreserved. Choice of Asset Segment Leads to Higher GNPA Source- CRISIL estimates Trend in Gross NPA 28 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2010 2011 2012 2013 2014 (%) For the year ended March 31 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
  29. 29. ©2014CRIISILLtd.Allrightsreserved. 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 29
  30. 30. ©2014CRIISILLtd.Allrightsreserved. Higher Net Interest Margin Offset by higher opex Large HFCs Mid-sized HFCs Higher NIMs Enable Management of Higher Opex and Credit Costs Source- CRISIL estimates 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 For the year ended March 31 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 For the year ended March 31 30
  31. 31. ©2014CRIISILLtd.Allrightsreserved. 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 31
  32. 32. ©2014CRIISILLtd.Allrightsreserved. Resulting in Profitability Broadly in Line with Large HFCs Source- CRISIL estimates 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 For the year ended March 31 Large HFCs Mid-sized HFCs 32
  33. 33. ©2014CRIISILLtd.Allrightsreserved. CRISIL Limited www.crisil.com LinkedIn YouTube FacebookStay Connected | | | |Twitter

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