Lending money to home buyers is a commodity business that has no barriers to entry, requires little capital, does not need upfront capex and easy to scale up as well as get out off. No wonder everyone is getting into.
Home Lenders generally earn about 15% ROE as that is the cost of equity given the risk profile of the business. but currently many lenders are earning 18-25% ROE with good growth potential. That is what is drawing new players to this industry. At 15% ROE and assuming a dividend payout ratio of 20%, a lender can grow at 12%. However, they are banking on high valuations of their equity to raise capital cheaply and grow faster than their sustainable rate before the opportunity window closes.
Along the way some lenders will realize that they have collected a bunch of NPAs but they will worry about that when that happens, until then they will pursue aggressive growth strategy.
At some point in 2019 - 2021 , PNB will be trading at those crazy valuations of 65++ PE, that is the time for me to get out.
Till then let’s enjoy the ride.
I have a very elementary question and would love someone to explain it to me like I’m 5. Why would people prefer borrowing money from HFCs compared to Banks? Given that the latter would mostly offer lower interest rates.
I think its mostly the process and efficiency. You should do a home loan application with SBI to realise (I did and know), and its and 2nd priority business for them.
Request you to keep on watching. Already trailing PE is 52+. I see a big trap. There is nothing great about PNB. Just process of PNB Housing does not help when growth rate in sanctioning loans is crazy. Soon, NPAs will kill and much before small investors, FIIs will be out of stock.
My first home loan came through the builder who sold me the flat - PNB way
back in 2000. Two years later I shopped around online and found IDBI which
pared interest rates sharply without pre-payment penalty. But I had to do
some running around to make prepayments since the office was located in a
remote place. I managed because I work flexi-time.
Today, people can compare home loan prices even more easily and shop
around. But HFCs have managed stickiness.
IMHO we are missing out the main play because of which these companies are attracting more participants. It is widening of the reach of such companies especially to people for whom cost of acquisition becomes as good as interest free (govt. subsidizing interest costs coupled with rental yields).
On a light note financially aware people (who have all the documents too) would always be migrating but believe me if we have to assume every one would/can do so then existence of lot of other companies/businesses also becomes a question and seems to be far from reality.
HFC, specially CANFIN Homes have said may times in interviews that they are not competing on ROI. There interest rates will always be higher than banks. Where stand apart is efficiency and granular reach. The ease of process and exploring newer customer at lower cost of customer acquisition.
As per my informed opinion, sectoral tail winds, lowering interest rates and well managed companies is fueling the HFC stock rally. How long it lasts is anyone’s guess. I do feel that it is a sustainable and solid business.
Its not a crime in investing in High PE stocks but it will be a major risk as if the company does not maintain growth momentum then there is possibility of the stock price coming down.
I love high PEs with growth. Sometimes even if growth is muted for a year or two as long as other parameters are intact. My issue is with the subsidiaries of PSU banks. Having worked majority of my career with Banks, I do not see how Canfin or PNBHousing can sustain the quality and growth. It could be great for a short while but one must be very careful. Most of the staff is same/on-deputation/similar to PSU Banks. I find it difficult to comprehend how such HFCs can suddenly grow to such heights with low / sustainable NPAs while parent Banks struggle on retail loan recovery. But these are my thoughts. A new management, strong tailwinds, longer duration market irrationality can do wonders.
The risk of losing money in buying low quality low PE stock (in non performing, out of flavor industry) is greater in my opinion. of course different opinions make market but not all opinions make money.
You are right. I was lucky to make clean 20 bagger in Page and also lucky with Titan making 8 baggar (from my 40PE entry). So when you start getting lucky in stocks like Page, Titan, Repco, Eicher, Bajaj Finance, you start wondering is the sheer stroke of luck or the quality of those stocks that make you multibagger returns. Because apparent entry in all these stocks were at “expensive” valuations as per equity experts.
The key is to get lucky in exits at appropriate time ( or to understand when to sell a stock ). Most of the stock advisors tell you which stock to buy and when but no one tells you when to exit. I normally get off the train when it slows down for 2-3 stations (quarters).
Hi Yatharth,
You make a very valid point. I wanted to understand it in detail. I see that PSU Bank controlled HFCs like CanFin have a large employee base working on contract. Also, these HFCs generate over 50% of their loan inquiries from brokers. Is it the same for the retail lending by the PSU banks?
~Thanks
Yes, in many PSUs, personal loan sourcing has been outsourced. I know Basant ji & Raamdeo ji are positive on HFCs but loans sourced though short term contract staff remind me of subprime crisis. Please draw your own conclusions. I cannot predict the future, only remember the past and to a very little extent, I can try to analyze what has already happened elsewhere.
I had attended the pre-IPO meet (at Trident Mumbai) of PNB Housing Finance where the management of the company had given presentation followed by Q&A. I had no intentions of applying in IPO though. The entire meet was driven by their MD Mr. Sujoya Gupta.
He had said the only thing common with PNB (their parent bank) was the 3 alphabets of English language…“PNB”. The entire management is different and not linked with PNB in any manner.
From the way he was talking about the company, its history, its processes and all his claims are backed by numbers.
Fortunately for me I was so impressed and although it was slightly expensive at that time (around 2.7-2.8 times book post IPO). I applied in IPO and was lucky to get the shares.
This post is to state the fact the management of PNB housing is different from PNB and the results are there in the numbers to see.
disc.: Invested.
