 "Higher costs, competition to impact home loan companies")
The stocks of housing finance companies (HFCs) such as LIC Housing, Dewan Housing and Indiabulls Housing have fallen by six-nine per cent since
November 1, while HDFC declined by 1.6 per cent. A combination of a recent spike in bond yields and increasing competition from banks — both negative for HFCs — are weighing on stocks.
The 10-year benchmark bond yield, at relatively benign levels till October, has been steadily inching up since. Yields, which plunged to a seven-year low of 6.67 per cent in May, now stand at 6.84 per cent, almost erasing the yield benefit since September 2015.
This is particularly negative for HFCs such as LIC Housing, which has around 80 per cent exposure to non-banking channels of funding. Likewise, HFCs such as Indiabulls Housing and Dewan Housing, too, have over the years increased their non-banking funding exposure to
51 and 41 per cent, respectively. Higher bond yields result in lower profitability as net interest margins (NIMs) tend to shrink with the cost of funds increasing. The pain on NIMs could intensify with heightening competition from banks. The past week witnessed State Bank of India and ICICI Bank softening their interest rates on home loans by 0.15 per cent to 9.15 per cent, respectively. “The market fears a combination of higher yields and tougher competition will hurt the profitability, particularly for the larger players,” says Digant Haria, assistant vice-president (research) at Antique Stock Broking.
Another analyst from a foreign brokerage, who did not wish to be identified, added that most HFCs have had a good rally since May on the back of lower bond yields. “Lower costs helped HFCs LIC and Housing and Dewan Housing expand their NIMs in the September quarter.”
This could gradually peter in the coming quarters as cost of funds is increasing when HFCs have little leeway to pass the burden on to their customers. “HFCs such as LIC Housing, whose NIMs have recently increased, might compromise on profitability to maintain market share in the industry,” says Siddharth Purohit, of Angel Broking. These two factors, according to analysts, could result in investor interest shifting to smaller HFCs. In fact, Haria advises investors to switch from larger HFCs such as HDFC and LIC Housing to mid- and small-size peers such as Repco and Can Fin Homes. “HFCs such as Repco have their unique set of customers and do not compete with banks,” Haria explains. Repco, Can Fin Homes and Dewan Housing are among the financiers which largely cater to tier-2 and tier-3 cities, where banking channel penetration, particularly that of the private sector, is relatively low. “These HFCs focus on affordable housing and their average loan size is relatively small and, thus, loan growth and NIMs will remain strong going forward,” Haria adds.
Most analysts agree with Haria, saying these stocks have the potential to deliver higher returns than large-cap HFC stocks in the next 12-18 months. But, there is a word of caution. While bad loans are currently under check, companies such as Repco, Dewan Housing and Can Fin Homes have had asset quality concerns in the past. “Stocks such as Repco and Can Fin Homes are perceived as high risk-high reward stocks,” warns Purohit.
November 1, while HDFC declined by 1.6 per cent. A combination of a recent spike in bond yields and increasing competition from banks — both negative for HFCs — are weighing on stocks.
The 10-year benchmark bond yield, at relatively benign levels till October, has been steadily inching up since. Yields, which plunged to a seven-year low of 6.67 per cent in May, now stand at 6.84 per cent, almost erasing the yield benefit since September 2015.
This is particularly negative for HFCs such as LIC Housing, which has around 80 per cent exposure to non-banking channels of funding. Likewise, HFCs such as Indiabulls Housing and Dewan Housing, too, have over the years increased their non-banking funding exposure to
51 and 41 per cent, respectively. Higher bond yields result in lower profitability as net interest margins (NIMs) tend to shrink with the cost of funds increasing. The pain on NIMs could intensify with heightening competition from banks. The past week witnessed State Bank of India and ICICI Bank softening their interest rates on home loans by 0.15 per cent to 9.15 per cent, respectively. “The market fears a combination of higher yields and tougher competition will hurt the profitability, particularly for the larger players,” says Digant Haria, assistant vice-president (research) at Antique Stock Broking.
Another analyst from a foreign brokerage, who did not wish to be identified, added that most HFCs have had a good rally since May on the back of lower bond yields. “Lower costs helped HFCs LIC and Housing and Dewan Housing expand their NIMs in the September quarter.”
This could gradually peter in the coming quarters as cost of funds is increasing when HFCs have little leeway to pass the burden on to their customers. “HFCs such as LIC Housing, whose NIMs have recently increased, might compromise on profitability to maintain market share in the industry,” says Siddharth Purohit, of Angel Broking. These two factors, according to analysts, could result in investor interest shifting to smaller HFCs. In fact, Haria advises investors to switch from larger HFCs such as HDFC and LIC Housing to mid- and small-size peers such as Repco and Can Fin Homes. “HFCs such as Repco have their unique set of customers and do not compete with banks,” Haria explains. Repco, Can Fin Homes and Dewan Housing are among the financiers which largely cater to tier-2 and tier-3 cities, where banking channel penetration, particularly that of the private sector, is relatively low. “These HFCs focus on affordable housing and their average loan size is relatively small and, thus, loan growth and NIMs will remain strong going forward,” Haria adds.
Most analysts agree with Haria, saying these stocks have the potential to deliver higher returns than large-cap HFC stocks in the next 12-18 months. But, there is a word of caution. While bad loans are currently under check, companies such as Repco, Dewan Housing and Can Fin Homes have had asset quality concerns in the past. “Stocks such as Repco and Can Fin Homes are perceived as high risk-high reward stocks,” warns Purohit.