Stick to top HFCS, suggest analysts
Smaller housing financiers with weaker balance sheets may lose market share
The decision of banking giants State Bank of India (SBI) and Kotak Mahindra Bank to slash home loan rates by 10-15 basis points (bps) to 6.70 per cent and 6.65 per cent, respectively, may pull customers away from pure housing financiers, especially smaller players, believe analysts.
On Monday, SBI announced a limited period offer, and cut rates to 6.70 per cent (for loans up to ~75 lakh) and to 6.75 per cent (for loans above ~75 lakh) until March 31. The lender will also give a 100-per cent waiver on processing fees.
Upping the ante, Kotak Mahindra Bank announced a 10-bps cut until March 31 to 6.65 per cent, applicable to both home loans and balance transfer loans across amounts. The lender, too, will give a 100-per cent waiver on processing fees. On Wednesday, HDFC Limited lowered its home loan rate — retail prime lending rate (RPLR), on which its adjustable rate home loans (ARHL) are benchmarked — by 5 bps, effective March 4.
Gaurang Shah, senior vice-president at Geojit Financial Services, says while the rate cuts by banks may offer opportunities to larger players like HDFC and LIC Housing Finance to step-up in the business, it may push small housing finance companies (HFCS) with weaker balance sheets to the corner.
Umang Shah, analyst at global brokerage HSBC, echoes the views and believes that the liquidity issue after the IL&FS crisis in 2018 and the Covid19 crisis in 2020 has skewed the benefit of lower systemic interest rates in favour of a few large non-banks, preventing lower-rated NBFCS/HFCS from competing with banks in the prime mortgage segment.
Why are banks a threat?
At the end of the December quarter, SBI and HDFC (including HDFC Bank) accounted for over 40 per cent of the individual home loan market. In absolute value, SBI’S total outstanding home loans as on December 31, 2020, stood at ~4.84 trillion; HDFC’S stood at ~5.5 trillion.
LIC Housing Finance, meanwhile, reported total disbursed loans during M9FY21 worth ~32,860 crore.
Overall, the top 5 and the top 10 players form 63 per cent and 80 per cent of the housing finance market, respectively, with only HDFC and LIC Housing Finance as major non-banking players among the top 10.
“Amid persisting asset quality concerns, banks are moving away from corporate loans and are tapping easy financing options, such as home loans… With SBI cutting rates, the impact will be felt across the sector,” says A K Prabhakar, head of research at IDBI Capital.
G Chokkalingam, founder and chief investment officer at Equinomics Research, opines that bank credit base is growing in low-single digits, at about 6 per cent, which is putting pressure on banks to extend loans. They are looking for opportunities outside core banking solutions where real estate (home loans) looks attractive, he says.
Analysts at HSBC believe that banks have lowered mortgage rates on the back of abundant liquidity and rising share of low-cost deposits, and limited avenues to profitably deploy such liquidity, given the gradual improvement in non-retail credit demand.
Time to book profit in HFCS?
Analysts equivocally believe the phase of low interest rates is in the last leg in India. Even as the rates may not rise anytime soon, they may not reduce either.
“I think we are at the lower end of the rate cut trajectory, and may not see further cuts… Banks are striving hard to get a larger pie of the housing finance business; this may impact some of the weak HFCS or smaller NBFCS which don’t have the expertise to manage the cost of funds,” says Shah of Geojit Financial Services. He is positive on HDFC, LIC Housing Finance, and Can Fin Homes.
Ajit Mishra, Vp-research at Religare Broking is also bullish on the sector, but believes the road ahead is not going to be easy for HFCS as competitive intensity is likely to increase. He recommends sticking with prominent players like HDFC and Can Fin Homes. In 2021, so far, many HFC stocks have gained in excess of 20 per cent with some up between 30 and 40 per cent. Analysts expect large HFCS like HDFC and LIC Housing Finance to capitalise on their strong market positioning and funding advantage, which should allow them to withstand near-term pressure from banks.