Funding costs, growth worries hit stocks of housing finance companies

While 30% of loans taken by eight firms mature in the near term, 45% of the book is financed through market borrowings

The stocks of housing finance companies (HFCs) are in a bear phase for the third consecutive trading session. 

Adding to their earlier losses, HFCs shed between 5 and 24 per cent during Tuesday's session. 

The key issues for the market are the ability of HFCs to maintain their margins and improve loan growth in the near term.

Firstly, shows that, on an average, 31 per cent of borrowed funds of eight HFCs will be maturing in the near term and this indicates the extent of elevated funding costs. 

With higher interest and yields trajectory, cost of newly issued, renewed and rolled over funds would be higher. 

Owing to stiff competition, HFCs would be forced to compromise on their profitability and take a hit on their net interest margin (NIM). NIM is the difference between interest earned and spent as a percentage of average loan book/interest-earning assets.

Also, HFCs are heavily dependent on market borrowings to fund their loan book. This is actually hurting them with the bond markets under pressure. As of June 2018, over 45 per cent, on an aggregate basis, of 8 HFCs' loan book is financed through non-convertible debentures and commercial papers, among others. 

“Since cost of funds are increasing, market participants are selling their investments in the secondary market to recoup residual benefits of higher returns seen in the rally of past two years,” said Rajesh Gupta, AVP-retail at SBICAP Securities. Some experts believe that HFCs would have to bear 5-8 basis point cut in their margins for every 10 basis point rise in cost of funds.

Due to the default at IL&FS, the problems were aggravated as market participants such as mutual funds and other debt investors are likely to be conservative in putting their money in HFCs, further worsening their cost burden.

Indiabulls Housing Finance’s issuance of commercial paper and bonds amounting to Rs20 billion is a positive development and will boost investor sentiment. The stock recovered at the end of Tuesday’s session. However, HFCs with low credit ratings could also find it challenging to avail financing, impacting their growth, say experts. Also, when interest rate is northward bound, debt investors typically keep their investment for the short term.

Hence, availing long-term funds from the debt market could be another challenge in the near term, indicating a possible asset-liability mismatch. "Either the funding cost will go up materially (under high interest rate situation) or one will run the risk of asset-liability tenure mismatch," said Prakash Agarwal, head-BFSI at India Ratings. 

As of March 2018, an average 27 per cent loan book of eight HFCs was financed through short-term borrowings. However, experts do not see this as a serious concern.

On the flip side, the overall situation could propel retail market share of banks, mainly their housing book. Many public sector banks and private-corporate lenders are focusing on retail book amid asset quality issues from large corporate accounts. Moreover, they have strong low-cost deposit base, containing high cost pressure at relatively large extent.