One thing to remember for low ticket home loans is the house is self occupied by borrowers. It’s not a speculative investment. Borrower will try his best not to default. Along with LTV of less than 70% makes it far more comfortable than second or third investment homes of salaried class.If economic crisis comes, of course nobody would be spared. But defaulting on your investments is far more likely than losing your primary roof.
In US crisis, the problem was elevated several times by LTV close to 100% plus banks not checking borrowers paying capability. They also had crazy refinancing that allowed them to cash out part gains on home equity without actually selling the house. Can’t rule out real estate bubble burst in India but situation might not get as scary as US.
I am not scaremongering or by any means implying that a real estate crisis is imminent, as I said I own Gruh and Repco and hope to for the long term unless things turn awry fundamentally.
The current standards of the Housing Finance Industry seem good with low NPAs, good credit management and more or less high quality players. But can we guarantee this will always be the case? Unscrupulous players are always attracted to opaque profit making sectors and they ruin the business for everyone.
If you study the US housing bust in- depth ( Highly recommend "“After the music stopped” by Alan Blinder) you will note that the initial sub-prime loan standards were quite high it was only at the later stages with the entry of dodgy finance companies that LTV’s increased and no documentation loans became popular.
Lets hope the Indian housing story doesn’t go this way. Actually my thinking on the finance business became a lot more skeptical after I saw Capital First’s aggressive plans. Reminded me of Countrywide Financial.
“subprime borrowers typically have a below-average credit history and are penalized for their poor credit with higher interest rates.” This seem’s like the official definition of subprime borrowers.
This definition has origin in US where roughly 57% of households actually pay direct income taxes. So for a significant majority of people there, lenders can know their earning ability and cash flows. It’s a different matter if many of those people didn’t maintained a good credit history (it’s more a matter of personal habit ?).
Also loved this little unrelated observation in the above link - a[U]nlike in the developed economies where informality is purely a deliberate choice to avoid taxation or regulations, in India it is more structural: a reflection of the lack of development and limited government reach.a
So a good part of what we are calling the India story is “happening”, outside of so called salaried/taxed entity as of today and this is a structural thing which will take a good amount of time under good governance practice to improve.
On regulation and competition:
All PSB’s are free and actually mandated to have a %tage of their lending to this section (broadly called priority sector lending). But so far they haven’t been able to tap this market due to their internal corporate structure issues and instead are giving out that lending facility to NBFC’s like Gruh etc who in turn are lending it to this priority sector. So, my point is it’s not like the prospective competition is not aware of the prospect of this business.
But of course new competition will come over a period of time, but right now the pie is just too large if we are reach anywhere close to decent level of financial inclusion for our whole population.
ON NIM we also need to know the size of loan book … smaller the size more efficient can be the loan raising and vis verca… that may explain why repco is enjoying a higher NIM , The real picture will come ones we see the loan book move up to a size of bigger players…
REPCO is a very long term growth story. One need not worry about a few quarters unless that start becoming a norm. Also there is a one time charge of 3.22 crore which can be ignored for realistic calculations.
I will be happy to load it up on Monday if Mr. Market take it down by 5% or so.
Disc: I have been accumulating since IPO level and the last I bought was at around 425. It is 17% of my portfolio and would not mind to take to 20-22% as the long term story remains in tact.
ON NIM we also need to know the size of loan book … smaller the size more efficient can be the loan raising and vis verca… that may explain why repco is enjoying a higher NIM , The real picture will come ones we see the loan book move up to a size of bigger players…
@shiv… Market cap ??? just refer to NIM on loan book size
anyways NPA seems to be upsetting in q1 , hopefully its just one off quater for tat … any view on this
R. Varadarajan - Managing Director addressed the call:Highlights by Capital Mkt:
The company has posted strong loan growth of 31% in Q1FY2015, driven by 24% surge in disbursement. The company expects to sustain loan growth in the 25-30% in the medium term.The loan mix between housing and loan against portfolio (LAP) stands at 80.8:90.2 at end June 2014.
With the strong capital adequacy ratio of 23.5%, entirely comprising of Tier - I capital, the company has large room for growth.The average loan-to-value (LTV) for the company stands at 62%.The company has posted healthy growth in PAT, despite high base and increase in NPAs.
GNPA ratio surged to 2.5% at end June 2014 from 1.5% a quarter ago. As per the company, an increase in GNPA ratio is mostly on technical reasons.The company proposes to reduce GNPA ratio back to 1.5% in FY2015.
In the absence of fresh NPA provisions, the provision coverage ratio (PCR) of the company declined to 36.4% at end June 2014 from 51.5% a quarter ago. However, the company proposes to improve PCR strongly in FY2015 and further raise to 100% in next few years.The spread and NIM stood at 2.8% and 4.4% in Q1FY2015. The company has spread and NIM target of 3% and 4%.The company expects to maintain expense ratio at 19-20% for FY2015.The effective tax rate is expected at 33-34% for FY2015.
I am not very comfortable with the volatility in NPAs be it for technical reasons or whatever. Not paying a loan installment for 90 days is a serious issue and implies that budget is indeed tight for the borrowers - mostly self employed.
Can someone clearly explain why a small time businessman’ s expenses blow up in the 1st qtr and stabilize thereafter?
I think we can have an unbiased look at GIC Housing Ltd, an out of favour stock (disclosure - I have vested interest in the stock and have been holding it since IPO).
A look at all the important ratios will show that the stock is trading cheap. All the required information can be accessed from any of the numerous sites that give information about stockmarket (eg moneycontrol.com) and also BSE and NSE.
Repco GNPA and NNPA are 2.49% and 1.60% in FY Q1 15 (2.22% and 1.52% in FY Q1 14).
Gruh GNPA and NNPA are 0.44% and 0.04% in FY Q1 15 (0.46% and 0.05% in FY Q1 14).
Their total customer base is less than 50K, so non-salaried is about 25K (50:50 split between salary and non-salary)… to know which segment of non salaried in Q1 defaulted is little hard to find out as every segment must be small. But total Credit loss Repco made till date is Rs. 4 Cr. out of total Rs. 7000 Cr. disbursements since inception. To me 0.06% Loan Loss in the starting phase of business is an encouraging figure (may be due to their better profiling through Repco Bank client base).
For me, mismatch of the Asset Quality of Repco vs. Gruh is more than adequately priced in at current valuation.
Missed to add, in the coming months how the small expansions in disparate geographies would help them maintain their loan book is something to keep a close tab on as the Repco Bank advantage would be missing there.
However, it is a long term bet on macro story / interest reduction / huge market and other more banal reasons we all know… Let’s see…
Disc. : Invested and plan to remain invested (<5% of portfolio)
This is the crux of the matter for repco. People do too much analysis on its NPA ratios and are often deterred from buying a great business.
They have NPA swings because nature of their clientele. They cater to a lot of non salaried people and those are the guys who are exposed to some seasonality as well as unexpected expenses against lumpy earnings.
Repco has shown tremendous growth of 30-35% since past many years and I think along with Gruh has something of a niche in the HFCs.
Currently the capital adequacy ratio is also high so they wont need to dilute equity too much. Their NIMs are quite high. The all important ROA is very good in the range of 2.5 to 2.7%.
I spoke to the MD Vardarajan during their AGM. Felt that the management was quite transparent and down to earth.
Regarding NPAs, the quarterly volatility is something investors have to live with given how self employed people in the south (mostly TN) manage their cash flows however their 14 year history shows that actual write offs are marginal so let us hope that the future is not too different from the past.
Apart from that the MD has a simple philosophy to become the next Gruh;
)- Maintain loan growth in the 20-25% range
)- Target NIM of 4%
)- Keep bad loans at less than 1% of book
)- Focus on core business; no unrelated expansions
