Housing Finance Companies

ForInternalUseOnly–NotForExternalDistribution©2014CRIISILLtd.Allrightsreserved.
Housing Finance Companies
Will they Continue to Chart a Steady Course?
Financial Sector Ratings, CRISIL
May 2014

©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

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

Competition in the Mortgage Finance Sector
is Intensifying
4

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

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
6

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

Asset Quality to Remain Healthy
8

Cumulative Collections Ratio in MBS
(Retail Housing Loan) Pools Remain Robust
Source: CRISIL analysis
Data as of December 2013 payouts
9

Overdues in MBS Pools Remain Low
Source: CRISIL analysis
Data as of December 2013 payouts
10

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

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
12

Profitability to Remain Comfortable
13

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
14

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
HFCs- Bond Issuance HFCs- Share in total bond issuance
15

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
16

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

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

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

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

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

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
22

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

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
24

Strategy 2: Grow the Non-Housing Portfolio
Portfolio composition- Large HFCs Portfolio composition- Mid-sized HFCs
 Increasing proportion of LAP in mid-sized HFCs
25
Non Housing Non Housing

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
26

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

Choice of Asset Segment Leads to Higher GNPA
Trend in Gross NPA
28
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

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

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
30

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

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
32

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