Some notes/thoughts based on AR18, HY19 results & conf call ->
Firstly, Can Fin Homes has remained focused on the retail loans for several years and has very minuscule part in builder loans, mezzanine funding, construction finance etc. (10Cr builder loan exposure on Sept’18). This has served them well in the past in terms of asset quality & hopefully this will continue to do so in future. I derive a lot of comfort from asset side book of CanFin.
Competition for Salaried Loan Book Pie
Next, around 72% of the book is from Salaried class & 28% is from non-salaried class. The average ticket size of CanFin is ~18L. From AR18,
So loans above >15L form a large part of loan book and some of these loans might have ticket sizes of 25-30-40L. So this side of the loan book will always face the competition from the banks as lending to salaried class is probably easiest form of underwriting. Management has conceded this fact in conf call by saying that balance transfer is a menace. (e.g. they did disbursement of 2600Cr & loan book grew by 1200Cr for 6M ending Sept 18 - Loan Book: Mar’18 - 15743, Sept’18 - 16935). The average rundown rate of loan book was 17-18% which has gone up to 23-24% in recent few quarters.
Management expects that - in rising interest rate & liquidity crunch scenario, balance transfer rate will go down & hopefully loan book will grow. To counter the balance transfer issue, management claimed to be expanding in tier 2/3/4 cities & deeper into rural/semi-urban areas. Also management is sharpening focus on EWS & MIG-1 segment by affordable housing loan centers (AHLC).
This also provides us with 2/3 patterns to check for NBFCs -
- To have some competitive advantage over banks in retail lending side, small ticket size is probably beautiful. In my view, the cost for a full-fledged bank to source loans worth size 3-5-10-12L might be very high & the motivation to go after that segment is probably low for banks.
Lending to non-salaried class with good asset quality is probably a very good competitive advantage. If one can keep the ticket size low in non-salaried class, that is even better!
These are two things that Gruh Finance probably does better than Can Fin Homes & hence the business resilience. I did not understand these things 2/3 years ago in terms of differentiating two businesses from one another.
Some observations from 7 year highlights (page 18/19 in AR18)
Firstly, market loves growth & multiple gets expanded during high growth phase & gets contracted when growth fizzles out. When we are investing in companies which have high multiple, it is important to do a lot of work on growth side of the story.
Loan disbursements hardly grew from FY17 to FY18 & so did the number of branches. Hopefully low growth situation shall get rectified with opening of 19 branches & 1 AHLC during Q2FY19. Further if book rundown rate comes down as claimed by management, at least loan book growth shall be visible over next few quarters.
2/3 observations from above snapshot -
- Firstly I think we are at probably lowest cost to income ratio for CanFin as loan book growth was achieved by more than doubling the business per branch(BPB)/business per employee(BPE) in last 7 years (BPB up from 48Cr to 109Cr). BPB seems to have plateaued at 107-109Cr from FY18 to HY19. With opening of new branches & corresponding hiring, cost to income ratio might start inching up.
- Secondly, last time cost of borrowing were 9%+ were in the years FY12-FY15. And the interest spread did go down from 1.89% to 1.39% before coming up to 1.72%. I do not have any insight to say that history might not repeat itself & interest spread remains a key moniterable for me.
A small technical detail which I have always wondered was - what leads the NIM > Yield?
it turns out that - it is quite simple actually =>
NIM = (Interest Earned - Interest Expended)/Assets = (Interest Earned/Assets) - (Interest Expended/Assets)
Spread = (Interest Earned/Assets) - (Interest Expended/Liabilities)
NIM > Spread => Interest Earning Assets > Interest Earning Liabilities.
i.e. decent part of assets are funded by non-interest bearing liabilities/equity.
Another thing to notice is that - in low growth scenario (i.e. Growth < RoE), for high RoE finance companies, capital adequacy ratio tends to go up.
Annual Rate Resetting
This feature that CFH introduced is a little bit confusing or misnomer.
For customers who have signed up for this feature, they get fixed interest rate for entire one year.
For customers who have not-signed up for this, their interest rates remain floating & banks can adjust them whenever they find it appropriate.
This feature probably helps (or helped ?) CFH in falling interest scenario (of 1 year liabilities) but this will have lagging effect on repricing in rising interest rate scenario. This also probably can explain fall in yield on advances in short term.
It was asked in Q2 FY19 conf call about the number of bankers & their division between private/PSB etc. The management deflected this question by saying that - quantum of funding is more important that number of bankers.
But AR18 does provide the name of the bankers - SBI, Laxmi Vilas Bank, Federal Bank, HDFC Bank & Canara Bank.
Another thing of interest here is relationship between parent Canara Bank & CFH. Page 80 of AR18 provides some details -
2568Cr worth of funding to CFH is provided by Canara Bank which forms ~22% of their total funding as of FY18. This number might have gone up in FY19.
As of FY18, 2000Cr+ of liabilities were funded by short term CPs which has average cost of 6.59%. The ratio was even higher in FY17. This was the primary reason for increase in spreads & RoA.
Going by Asset Liability management table for FY18, ~3477Cr worth of NCDs/CPs are going to mature in FY19.
It seems like the CPs worth 2000Cr are being refinanced with bank loans & effect on spread & NIM is already visible in HY19 results.
HY19 funding details ->
Market borrowing went down from 60% to 46% and bank borrowings went up from 19% to 45%.
Final observation regarding, NCDs ->
The duration of NCDs for ranges from 2 to 5 years as per AR18. They have managed to raise quite a bit of funds with 5 year NCDs. The NCD rates will go up further resulting in margin pressure. But impact from CPs on margins might be much higher.
In summary, CFH is a company that has done good job on asset side in terms of asset quality & loan book growth might go up due to newer branches & lower rundown rate. But margins might remain under pressure due to replacement of CPs with bank lines & rising yields.
I will continue to track CFH for few quarters in terms of growth & ability to hold on to margins within reasonable range before taking any call.
Disc - CFH forms < 3% of my portfolio, no transactions in last 60 days. This is not a buy/sell recommendation, investors are advised to do their own due diligence.