Indiabulls Housing Finance – A Pragmatic Mover

Indiabulls Housing Finance Ltd (IHFL) is one of the largest housing finance companies in India with asset under management (AUM) of Rs 94,400 crore. It was established as a wholly-owned subsidiary of Indiabulls Financial Services (IBFSL), a leading non-banking financial firm providing home loans, commercial vehicle loans and business loans. IBFSL was incorporated in 2000. In early 2013, keeping with IHFL’s long-term commitment to the housing finance business, the company was reversed-merged into its housing finance subsidiary IHFL. IHFL offers a broad suite of lending and other financial products to target client base of middle and upper-middle income individuals and small and medium-sized enterprises, or SMEs. Its presence is spread across India in more than 200 locations and has in-house sales team of sourcing agents.

IHFL, a prominent mortgage financier, emerged much stronger after down-sizing riskier assets post fiscal 2009. The company is undergoing structural metamorphosis with steady 20 per cent plus asset growth, credit rating upgrades and active sell-downs supporting its best-in-class net interest margins (NIMs).

Indiabulls Housing Finance Ltd has acquired 40 per cent stake in London-based Oak North Bank, in 2015. The Oak North Bank is going operationally well and has a positive contribution to the profit and loss.

Robust growth momentum sustained

Based on the recent update by National Housing Bank (NHB), IHFL is well-placed given its market positioning. The lender has continued to deliver consistent strong operating performance, in line with guidance maintaining growth guidance of 20 to 25 per cent, across financial parameters.

IHFL’s growth momentum has sustained with increase in disbursement 29 per cent on year to year (YoY) basis leading to strong AUM growth of 33 per cent on YoY basis. Management believes that the current competitive landscape is reasonable encouraging and points that the business has gone beyond March levels in June 2017, with similar performance in July as well.

Shift towards home loan segment

The call for Housing for All by 2022 by the government in 2015, has given a massive push for affordable housing for the country’s billion plus population. Benefitting from this affordable housing thrust, IHFL is also focusing on home loan segment. This is evident by increase of 4 per cent in share of core home book. The share of home loan book by fiscal 2020 will be two-thirds.

During fiscal 2017, home loan disbursals up to Rs 25 lakhs have compounded at 33 per cent. Consequently, home loans up to Rs 25 lakhs now comprise 76 per cent of the overall pool. The growth is led by home loans as tilt is shifting towards core home book with 57 per cent share where as the repayment trend in home loans was significantly lower at sub-10 per cent on annualised basis.

The total disbursements across the segments are distributed across segments as home loans with Rs 3,800 crore; LAP with Rs 1,400 crore and corporate mortgage with Rs 1,600 crore. Whereas the loan book proportion across segments follow 57 per cent for home loans,  21 per cent for LAP and others comprise of 22 per cent share. The pre-payment rates have come off with home loan pre-payment rate at 62bps on monthly basis.

Pradhan Mantri Awas Yojana (PMAY)

Launched by Prime Minister Narendra Modi, the Pradhan Mantri Awas Yojana (PMAY) Credit Linked Subsidy Scheme (CLSS) is for the economically weaker section, low income group, middle income group-I and group –II. Through this scheme, the beneficiary is eligible to avail interest subsidy on the purchase or construction of a house. The scheme is also available for the enhancement of a dwelling unit. Given PMAY subsidy schemes and tax reductions, the middle-income affordable housing space is seeing good traction. The operational aspects of the scheme have also smoothened out. People can now receive subsidies within 30 days of submission of the claims.

GST and RERA impact

GST and Real Estate Regulation and Development Act (RERA) will bring structural changes in the housing sector, which will be positive as the sector gets formalised. However, during the transition phase, IHFL will remain cautious on commercial finance book.

Implementation of GST for the sector would make housing affordable and RERA offers to bring fair practices that would protect the interests of investors and impose penalties on builders in case of sub-standard quality of construction or inordinate project delays. Besides, RERA looks forward to addressing issues like price, the quality of construction and other changes that will protect home buyers from unethical players.

Spreads and margins

Despite the shift towards home loans, the spreads on book basis were sustained at 3.24 per cent with funding cost benefit flowing through; tilt towards lower-cost market borrowings at 52 per cent as against 38 per cent in 2016 and benefit of lower funding rate of bank borrowings marginal cost-based lending rate (MCLR) benefit. Presently, spreads on incremental basis stands at 3 per cent.

Going forward, the recent upgrade by ICRA Limited to highest AAA rating will enhance the benefit to cost of funds.

The guidance on maintaining the spreads is 3 to 3.25 per cent on book basis and 2.75 to 3 per cent on incremental basis. Also, the incremental yields for home loans and commercial segments are at 8.9 per cent and 13 to 13.5 per cent, respectively, with yield for loan against property (LAP) remaining stable between 11.25 to 11.5 per cent.

The margins will remain at higher end of guided range on both incremental disbursements and stock of loans. Presently, the borrowing profile comprises of 40 per cent mutual funds (MFs), 30 per cent insurance or pension funds (PFs) and 30 per cent foreign portfolio investor (FPI) or banks. Over time, this is expected to move to 40 per cent MFs, 40 to 45 per cent insurance or PFs, and 15 to 20 per cent FPIs or banks.

Descending cost-to-income ratio

For the quarter ended in June 2017, the cost to income ratio declined by 40bps over the last quarter of 2017 levels. The cost-to-income ratio has been on a downward trend and management is optimistic that the ratio will be less than 12 per cent for the year ending fiscal 2018. Moreover, the ratio is expected to be in single digit as per guidance for financial year 2020.

The rising proportion of e-homeloans and Smart City home loans at 22 per cent and 8 per cent of incremental home loans, respectively, has benefitted the cost-income ratio. The benefits of these home loans initiatives are flowing through and have further supported the earnings as well.

Sell-down of loans to drive capital efficiency and maximize RoE

During first quarter of 2018, IHFL sold down Rs 2,000 crore of loan assets; it is the highest amount that is ever sold in first quarter of any year. This amount represents 64 per cent of the incremental loan assets that were added during the quarter. Over the course of the year, IHFL will increase tier-II capital to 4 to 5 per cent of capital adequacy.

Asset quality intact

The asset quality improved impressively with fall in gross non-performing loans (GNPLs) at 80 basis point (bps) as against 85 bps in 2017. According to the grading of CRISIL, the loan against property (LAP) book of IHFL indicates the company’s disbursements tilt is towards LAP 1 or 2 grading, which is highest or high quality, forming 9.8 per cent and 81.6 per cent, respectively till date.

Higher proportion of in-house sourcing, which is more than 80 per cent, lower loan to value (LTV) ratio and focus on low-risk lease rental discounting (LRD) enabled IHFL to maintain its stable asset quality. The company aims to maintain credit cost at 60 to 70bps. Over the next 15 to 18 months, the asset base will likely cross one billion pounds.

Guidance for financial year 2020

The balance sheet of the housing finance major is expected to be Rs 2 trillion followed by profit after tax (PAT) more than Rs 5,500 crore. The proportion of bonds is expected to increase to 60 per cent by year 2020.

What next?

The housing finance company’s growth momentum is sustainable owing to the strong demand environment set by PMAY, affordable housing aspects and further tailwinds for funding cost and rating upgrades. Given the huge opportunity landscape, IHFL is expected to deliver strong loan growth, but lower spreads is likely to lead to 24 to 25 per cent net interest income (NII) growth.

An optimal product strategy with stringent risk mitigants to manage non-performing loans (NPLs), stable franchise, high liquidity and low gearing will sustain superior return ratios return on assets (RoA) and return on equity (RoE) of more than 3 per cent and 25 per cent, respectively post the raising of funds. Moreover, high dividend yield and consistent earnings delivery will lend predictability and result in further re-rating of the stock.

Stringent risk mitigants will manage NPLs and tight cost control will help deliver consistent 20 to 22 per cent earnings CAGR over expected earnings of the period 2017-19.

Major Risks for IHFL 

• Growth and Earnings: Delay in the real estate sector will adversely hit growth and earnings. Moreover, it will also impact the default rates and resurgence in the event of default.
• Profitability and Margins: IHFL’s growth and profitability will be impacted severely owing to unfavorable regulatory changes such as increase in risk weights, cap on the interest spread under refinance schemes et al. In addition to this, changes in the terms and eligibility conditions of the refinance schemes can also impact the margins.
• High asset quality risks: More than 25 per cent of home loans come from the category of people who are self-employed. This indicates the company’s high asset quality risks as these borrower segments are susceptible to volatile income stream.

neha.seth@outlookindia.com