Housing finance companies are likely to perform better than their counterparts

Housing finance companies are likely to perform better than their counterparts in the financial sector, such as banks, in the long run. However, it may not be long before the slowdown pressure catches up with them too

K AR AN SEHGAL ET I NTELLIGENCE GROU P

WHILE real estate companies are reeling under the pressure of slowing demand, lack of funds and mounting interest payments, the housing finance companies seem to be faring much better. However, there is no denying that the housing finance companies faced a slowdown and it did shave off a few percentage points from the high growth rates. For instance, the biggest mortgage player in India, Housing Development Finance Corp (HDFC) witnessed a 2.3% year-on-year (y-o-y) fall in its profit in the quarter ending December'08. This comes on the back of 27.1% growth in the September '08 quarter. The going was a bit easier for the second largest player, LIC Housing Finance. The net profit of the company grew by 26.7% in the December '08 quarter vis-à-vis a 47% growth for the six months ending September'08.
    The U-turn in the growth trajectory of housing finance companies was the result of a sharp fall in the growth of loan sanctions and disbursements. Here, too, HDFC was hit severely, as its loan sanctions fell by 7.6% y-o-y in the December '08 quarter. The fall was even more audacious if the numbers are compared on quarter-on-quarter (q-o-q) basis. HDFC's sanctions were down 32% q-o-q in the December '08 quarter. The fall was not as steep for disbursements, as it includes the loans sanctioned in previous quarters as well, when the economy was in better shape. In case of LIC Housing Finance, the growth in new loan sanctions came down to 15% in December '08 quarter compared to 30% in September '08 quarter and 55% in the June '08 quarter. Thus, both the companies were affected by the slowdown. However, while saying so, we must consider the turbulent money market conditions in India in the month of October '08.
    The tightening liquidity had pushed up the call rates to 20%. The uncertainty with respect to economy and especially the money market was insurmountable. This led many non-banking finance companies (NBFCs) to put brakes on expansion plans. NBFCs preferred to keep their house in order, while keeping the fundamentals intact.
    This is evident from the high asset quality of both HDFC and LIC Housing Finance. In fact, both the companies have improved their asset quality in the December '08 quarter. The net nonperforming assets (NPAs) of HDFC formed a mere 0.6% of its advances in the December '08 quarter compared to 0.81%, a year ago. The net NPAs constituted a mere 0.73% of LIC Housing Finance's net advances in December '08 compared to 1.61% a year ago.
    LIC Housing Finance has, in fact, improved its performance on net interest margin (NIM), another key measure. NIM is arrived at by dividing the difference of interest income and interest expense by interest earning assets. LIC Housing Finance's NIM stood at 3.23% in the December '08 quarter, showing an improvement of 31 bps q-o-q. On the other hand, HDFC's NIM shrunk by 10 bps q-o-q. On a y-o-y basis, it has seen a 70-bps slippage in NIM and this was the main reason behind the fall in profits.
    The interest rates have come down after the rate cuts by Reserve Bank of India. Sufficient liquidity is available in the system. This augurs well for housing finance companies, too, much like banks and other financial institutions. However, the economy is slowing down. As per the latest data released by the Central Statistical Organisation (CSO), the gross domestic product of India grew by just 5.3% in the December '08 quarter. This would definitely have an impact on housing finance as well. However, the demand for housing is relatively inelastic to the overall growth in India. This is due to low home ownership levels in the country compared to other parts of the world.
    In a nutshell, housing finance companies are likely to perform better than other financial institutions like banks in the long run. However, they won't remain unscathed by the slowdown. Therefore, the growth numbers are likely to be on the lower side compared to those of the previous years like FY07 and 2008.
    karan.sehgal@timesgroup.com