Jefferies Sees Near-Term Headwinds For Housing Finance Companies  

Jefferies sees near-term headwinds for Indian housing finance companies arising from pressure on spreads -- difference between lending and deposit rate -- and the threat of competition from public sector banks post recapitalisation.

The global investment banking firm, however, continues to remain constructive on these stocks from a medium-term perspective.

These companies are exposed to competition from PSU banks, with salaried home loans and large ticket loan-against property segments being the most exposed post the government's recapitalisation plans, Jefferies said in a report.

LIC Housing Finance Ltd., which has a higher share of salaried home loans in its portfolio (83 percent), stands to be impacted the most, while PNB Housing Finance Ltd. and Repco Home Finance Ltd. with a higher share of non-salaried loans at nearly 40 percent may be less impacted.

Jefferies has also made a case for higher pressure on spreads of housing finance companies, with the likely bottoming out of bond yields. Spreads of most HFCs have been generally inversely correlated to bond yields. HFCs had benefited from falling bond yields in the last few years.

Borrowing Mix Of HFCs

According to Jefferies, non-covertible debentures account for 79 percent of LIC Housing Finance's liabilities.

But bond yields have now rebounded nearly 60 basis points from the recent lows in September to cross 7.1 percent levels on increasing concerns surrounding fiscal slippage and supply of paper, which means little or no scope for further reduction in funding costs of HFCs with higher share of borrowings from NCDs.

“If bond yields rise, HFCs with shorter duration liabilities or higher mix of NCD funding could see greater pressure on spreads,” said Jefferies Analysts Bhaskar Basu and Harshit Toshniwal in the report.

Hence, given the limited pressure on net interest margins (on lower threat from PSU bank recapitalisation) and stronger growth outlook, Jefferies believes asset financiers may outperform HFCs in the near term.

It prefers asset financiers like Bajaj Finance Ltd. (strong growth) and Mahindra & Mahindra Financial Services Ltd. on its leverage to rural recovery.

Stock Performance Of HFCs Lagged

While optimism around strong growth outlook owing to housing demand and affordable housing push under the Pradhan Mantri Awas Yojna drove the sharp rally in stock prices of HFCs on a year-to-date basis, stock prices of HFCs have pulled back in the last few months.

Jefferies' Top Picks Within HFCs

Within HFCs, Jefferies prefers PNB Housing Finance due to its balanced mix of salaried, non-salaried home loans, low funding costs and strong growth outlook. They have a ‘Hold' rating on LIC Housing Finance as they do not expect any meaningful improvement in NIMs in the near term. Normalisation at Repco Home Finance could be some time away even though factors affecting loan growth and asset quality are bottoming out, the report says.

Jefferies Rating Summary On HFCs

• ‘Buy' on PNB Housing Finance with a target price of Rs 1,740.
• ‘Hold' on LIC Housing Finance with a target price of Rs 613.
• ‘Hold' on Repco Home Finance with a target price of Rs 585.