Housing finance companies in the slow lane

The moderation in the loan book was on account of lower disbursement growth and higher repayment as customers switched to housing loans from banks, which have lowered their lending rates


Real estate prices have remained subdued in the metros and are hurting housing finance companies, which are present in the mid to high income segment. Photo: Ramesh Pathania/Mint
Real estate prices have remained subdued in the metros and are hurting housing finance companies, which are present in the mid to high income segment. Photo: Ramesh Pathania/Mint

Shares of housing finance companies LIC Housing Finance Ltd and Dewan Housing Finance Ltd (DHFL) have slumped 5% and 21%, respectively, as growth momentum has tapered amid a subdued real estate market.

Disbursement growth for LIC Housing Finance will moderate to 15% in FY16, compared with the around 18% growth in FY15, according to analysts. Their outstanding loan portfolio grew 15.2% in the December quarter, slower than the 17% growth seen in the quarter ending September. Loan growth, excluding loan against property, was around 12%, down from the around 18% year-on-year growth in the September quarter.

The moderation in the loan book was on account of lower disbursement growth and higher repayment as customers switched to housing loans from banks, which have lowered their lending rates. Real estate prices have remained subdued in the metros and are hurting housing finance companies, which are present in the mid to high income segment.

Growth for DHFL, which is present in the low income segment, is also expected to slow in the coming quarters on the back of a high base. Harshil Mehta, chief executive officer at DHFL, said they expect loan growth to slow to around 18-20% after clocking 24% growth in the quarter ending December.

Housing finance companies are growing their loan against property (LAP) portfolio and project finance portfolio aggressively.

LIC Housing Finance continued to grow the LAP portfolio at a robust pace and it is contributing 6.4% of the overall book, compared with 5.4% a quarter ago.

DHFL is growing its project loan portfolio at a faster pace. Project loan contribution to the overall portfolio of DHFL stood at 8%, compared with 6% in the quarter ending September. Project loan portfolio makes up of loans for residential housing projects in tier II cities.

Mehta said they are looking to build their small and medium enterprise portfolio for mostly machinery and equipment finance, which they have just entered in the past six months.

While the loan growth momentum is slowing, housing finance companies may continue to expand their margins, buoyed by the decline in the cost of funds and a better product mix.

LIC Housing Finance will maintain net interest margins at around 2.5-2.6%, helped by higher spreads from the LAP portfolio. The proportion of LAP and developer book to the overall loan book will be slightly over 10% by the end of FY16 from the around 9% in the quarter ending December. DHFL is looking at maintaining margins in the range of 2.8%-3% on the back of a good product mix and a decline in the cost of funds as they are increasing their share of borrowing from the wholesale market.

Asset quality remained stable with gross non-performing loans at 0.84% for DHFL and 0.58% for LIC Housing Finance. DHFL shares are trading at 1.04 times and those of LIC Housing Finance at 2.6 times book value for FY16. A further upside for the shares is limited unless loan growth momentum picks up.

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