Housing Finance Companies AUM To Grow In Double-Digits

BY Realty Plus

The Indian residential real estate sector is experiencing robust demand, backed by strong macroeconomic fundamentals. While drivers such as improving affordability, rising urbanization, low mortgage to GDP ratio, favourable demographics & government policies have been traditional underlying growth drivers; shift in post pandemic consumer behaviour towards preference for open living spaces, premiumization as well as other factors such as low interest rates, stamp duty rebates resulted into an up-cycle in residential real estate market. These forces are set to sustain housing demand over the medium to long-term.

Since the pandemic, housing demand has surged, further supported by low interest rates and beneficial policy measures, leading to sales of residential units reaching a decade-high of 470,424 units in CY23, with 467,449 new launches. Despite the Reserve Bank of India's cumulative repo rate increase of 250 basis points from May 2022 to February 2023, residential demand has remained robust.

In sync with a rebound in the residential real estate market, retail loans started witnessing an uptick from FY22. Consequently, the AUM growth has been led by retailisation. During FY23, the overall AUM of HFCs grew by roughly 9% with the housing segment growing by 13% while the non-housing portfolio including the developer finance book contracted marginally. The total outstanding portfolio of HFCs as of March 31, 2023, stood at Rs. 7.4 lakh crore (excluding HDFC Ltd) of which housing loans comprised Rs. 5.5 lakh crore vis a vis housing loans by SCBs amounting to Rs.19.4 lakh crore.

The share of builder loans has shown a declining trend while retail loans have been rising in the overall portfolio mix. Post 2019 developer and NBFC/ HFC crisis, developer finance portfolios of HFCs witnessed stress thereby resulting in conscious curtailment. Apart from issues in developer financing, the growth in retail loans was also contributed by higher disbursements post regulatory guidelines on the principal business of HFCs.

However, going forward, in the backdrop of strong residential sales, a shrinking pool of stressed developers and progressive resolutions/ recoveries within the developer financing book, the share of developer financing is expected to gradually pick up in the medium term.

Given the rebound in the residential real estate market, growth, and receding credit costs; profitability indicators for HFCs inched up during FY23. The majority of prime-housing-focused HFCs passed on rate hikes to customers in tandem with the rising cost of borrowings. With the yield on advances rising faster than the cost of borrowings, HFCs saw an improvement in margins during FY23. Improving margins coupled with waning credit costs have resulted in better profitability.

Going forward lenders are expected to adopt a calibrated approach between growth and asset quality. Further, anticipated interest rate cuts in FY25 are also expected to lead to downward pressure on margins as portfolios reprice faster vis a vis borrowing. While net Interest Margins (NIM) are expected to remain under pressure, overall profitability is expected to improve largely supported by declining credit costs.

For FY24, CareEdge Rating expects the ROTA of HFCs to be near or marginally exceed pre-covid levels. Waning asset quality stress While developer financing portfolios of HFCs started showing signs of stress post-FY18, retail asset quality metrics witnessed deterioration led by pandemic-induced economic slowdown which largely impacted self-employed customers. However, with FY23 being the first full year of recovery in economic activity and improving demand, NPA levels have shown improvement which is expected to continue.

Net NPA to net-worth for HFCs has also improved from 16.6% to 11.7% signifying improving balance sheet strength and provision buffers. Stage 3 provision cover ratio which is estimated at 42% for housing finance companies as of March 31, 2023; is expected to remain healthy in the range of 44-46% in the near to medium term as HFCs continue to hold sufficient provisions to mitigate any credit risks. Wholesale book stress receding Stress in wholesale portfolios (including softer delinquencies+ NPA pool) of some HFCs which started to rise post2018, peaked during FY22 and has started reducing since then. CareEdge Ratings interactions with HFCs as well as management commentaries point to expectations of better resolutions and recoveries of hitherto stranded projects in the scenario of improved sales velocity.

Further, the overall percentage of HFCs portfolio in stage 2 improved to 5.1% as of March 2023 as against 9.0% as of March 2021 thereby depicting holistic improvement in asset quality. Bank borrowings continue to be a major source of funding While bank funding is expected to continue to have a lion’s share in the funding profile of HFCs, funding from capital markets which has remained range-bound over the last few years is expected to rise.

Within the capital market participants, a look at debt mutual funds exposures to HFCs too shows a declining trend post 2019. While risk aversion within debt mutual funds was already underway owing to the credit crisis, the move gained further traction after the winding up of a few debt mutual schemes as well as significant regulatory changes such as sectoral caps etc. This led to a decline in debt mutual funds exposure to the HFC sector from peak exposure of 9.5% of overall AUM as of June 2019 to 4.5 % as of September 2023.

While the merger of HDFC Ltd into HDFC Bank in the recent past has further exacerbated this decline, the merger has opened sectoral limits for debt mutual funds for further investments in paper issued by HFCs. This along with expectations of rate cuts during FY25, rising spreads, and stronger HFC balance sheets is expected to increase the share of funding from capital markets in the HFC overall borrowings profile in the near to medium term.

Tags : Indian residential real estate sector CareEdge Rating ROTA HFCs