There seems to be contradictory opinions about the impact on HFCs. Today, I saw a new which says demonetization is not a good news for HFC, especially that has high LAP exposure (Canfin has it at 6%). On the other hand, MD / CEO of HFCs say this is good news for them as if property prices fall down, it will generate new loan growth as more people will be interested in investing in real estate. So probably we need to see which HFCs will be impacted due to this action from the government.
This could be an issue with managing NPA rather than loan book growth. NPA can rise if borrowers default and the value of the asset / collateral (homes/land prices) fall. If this is correct, it directly relates to management practices. Any company that has lent with proper care would not get into default / npa situation just because of this.
Hi, can you share the link from where you got the information that Canfin has a LAP exposure of only 6%…thanks
Harsha, its mentioned in their H1 FY 17 presentation. Link is http://www.canfinhomes.com/Q2%20FY17%20CanFinHomes%20Final-18.10.16.pdf
Key Highlights -
78% of all loans to salaried / professionals
6% of all loans are LAP (split 50 - 50 between Salaried and non-salaried)
Of the non-salaried loans about 80% are conventional home loans…
Finally avg loan size is 18L (hardly into black money operator territory)
Gave me more confidence in Canfin
Low LAP is good or bad?
Low lap is good, if u want assurance of asset quality. But low lap leads to lower profitability, as lap is high interest business generally.
Here is some comparison of housing finance companies that I prepared using data extracted from Capitaline
Size - Can Fin homes is tiny compared to others so growth should be good.
I generally classify HFCs based on the rates they charge as that determines the profile of borrowers and risks. Indiabulls is a sub-prime lender and LIC is safest. HDFC is quiet safe and Canfin is close to the safe lender category. Yields are also dropping across the boards with high interest lenders seeing the biggest drop. IMO is this actually good for the industry as loans becomes affordable and default risks reduces.
Cost of funds - One of the most important number for an HFC is cost of funds as lower costs helps an HFC offer lower rates and that allows it to attract safe borrowers keeping credit costs low. All bank related HFCs have low cost of funds (HDFC, Canfin, PNB Housing and Gruh) whereas others have higher costs. Cost of funds is dropping over last 3 years which allow lenders to lower their lending rates while protecting their interest margin.
Net Interest Margin - The holy grail of lending business. Despite dropping yields some lenders have been able to maintain or even improve their NIMs. Indiabulls is at the top, Repco and Gruh are close second (due to their high cost loans). LIC is the lowest as it as low yield and high costs. Canfin and PNB are somewhere in between. These numbers are still better than banks and other NBFCs. Only MFIs have higher NIMs.
Return on avg assets - IMO this number is more important that NIM as assets are funded by both debt and equity and NIM captures only the debt costs.
Leverage - Perhaps the most important risk indicator. Indiabulls and Repco has the lowest leverage reflecting it’s risky asset base and LIC has highest as it has safest assets. ratio for PNB is pre-ipo so current ratio is about half. HDFC numbers are standalone.
Return on Avg Equity - The most important number from an investor’s perspective. This number sums it all. Gruh is the clear winner with it high interest loans and low cost of funds. Indiabulls is close second as it has managed to earn a high yield assets while keeping interest and credit costs low. What is remarkable is it is able to earn a high ROE without leveraging it’s equity with too much debt. It’s leverage is among the lowest.
Canfin is just about average. Industry as a whole managed an average of 17-18% which I think is good.
Next set of charts compare the cost structures
Credit costs - Provisions as % of Total Income. Ability to manage credit costs is IMO most important ability. Indiabulls with it’s risky loans has highest costs while LIC HDFC are lowest. PNB’s credit costs are rising at an alarming rate. They may be loosening credit standards in order to grow.
Spike in HDFC in 2016 is a one time cookie jar provision (using the windfall gains from sale of insurance stake).
Operating costs - Everything other than provisions, interest and tax as a % of total income… This is the cost of running the business. HDFC LIC clearly has an economics of scale. PNB is growing so costs should come down. Canfin is average.
Interest Costs - Interest expense as % of total income. Biggest cost component. LIC has the highest interest costs as it makes low interest loans and is not linked any bank. Indiabulls managed to fund high interest loans with low interest funds. Canfin is somewhat on the higher side but there is big improvement in this metric in recent quarters. IMO this is the single most important driving price of Canfin.
Net Profit Margin - The bottom line. Not as important as ROAA but an important metric. This is what is left after all costs are paid and (sufficient) provisions are made. This number can be easily manipulated by manipulating provisions. Cookie jar provisions are common here. Indiabulls scores here.
Growth in loan assets - What investors chase. Big ones grow slow, smaller ones are racing. This will continue if the industry is not hit with a wave of defaults.
Overall, I think HDFC GRUH scores good on safety and quality but have low growth rates, LIC is safe but low profitability and low growth, Dewan has bad numbers in most metrics, Canfin and PNB are improving and growing, Repco is on a slippary slope, Indiabulls for not for faint of heart, GIC is a dog.
Disc - Invested in Canfin, PNB and Indiabulls.
Posted a similar analysis on the MFI industry.
http://forum.valuepickr.com/t/indian-microfinance-sector-and-the-companies-in-the-sector/3800/232
Thanks Yogesh!
This is really informative. Pictures make comparison much easier. I had a suggestion if you have time. Interest Spread is a better measure of operating performance of lenders than the NII. This is because NII is affected by the leverage of lenders. If you can add a graph of Interest spreads, then that would be great.
Thanks Yogesh. What is IMO?
Good catch. Interest rate spread is similar to Net Interest Margin but it does capture management of interest risk better than NIM.
As can be seen from the chart above, Net Interest Spread is similar to Net Interest Margin except for the effect of leverage. Underleeraged companies (HDFC, GIC, Repco and Indiabulls) score better in terms of NIM but their advantage is muted with looking at Net Interest spread.
formulas used.
Yield on Average Assets = Interest Income / Avg Loan funds
Cost of Avg funds = Interest Expense / Avg Borrowings
Net Interest Margin = (Interest Income - Interest Expense ) / Avg loan funds
Net Interest Spread = Yield on Average Assets - Cost of Avg funds
IMO is short for In My Opinion.
Hi Yogesh,
I think the credit costs numbers may not be showing an accurate picture due to DTL and standard provisioning etc. -> the best indicator is just the net provisions for NPAs as a % of total assets. Can you show the same in a chart pls.
Thanks,
Sarvesh
Fellow members: Can you share your opinion on how / if the demonetization scheme will impact the housing finance companies, especially Canfin Homes (both on the business and the share price). Thanks.
Credit costs do not include tax provisions. I think standard provisioning should be considered as credit costs as this the amount that is set aside for loan losses that are expected in future on the loans originated in the reporting period and invariably these provisions are less than actual losses.
Are you referring to any specific data points (ratio, company & year)? If you think any specific data point is incorrect, let me know and I can cross check with annual report.
As you suggested, credit costs can also be represented as provisions & write-offs as a % of loan assets (instead of total income). Lenders try to manipulate this ratio by rapidly growing the denominator (loans). Since loans generally begin to go bad 2 years after disbursement, I generally look at credit costs as a % of loan assets two years ago to get a better read.
In the chart above, credit cost pattern is similar to the one I posted earlier for companies with moderate growth rates (HDFC, LIC, GIC etc). Credit costs are appear to be higher for high growth companies like PNB Housing and Indiabulls. Canfin scores well in this ratio indicating it’s asset quality is intact even after a strong growth in last 2-3 years.
Dear Yogesh
Repco had indicated increasing provision levels during last quarter results as a cookie jar. Did not understand why you are mentioning that it is on a slippery slope. The portfolio is more or less comparable to Canfin- I thought.
Disc- Invested in both Repco and Canfin
Can Fin Homes is hosting a conference call at 11 AM to explain the effects on demonetization on their company as well as the whole sector. Mr. Murthy sold 1.53 Lakh shares of Can Fin Homes yesterday. I couldn’t resist myself yesterday and bought a very high quantity of Can fin at 20% lower circuit. 6% LAP, low average ticket size, most loans to salaried people and most payments are done electronically gave me very good confidence. People can refer to Mr. Hota’s interview yesterday on ET NOW channel.
@Yogesh_s: Thank you for your hard work. It was very easy to understand the housing loan sector and the companies in it. I’m a noob in it and I was able to learn many new terms as well as proper way to analyze such companies.
Does anyone have the link of Mr. Hota’s interview (telephonic) on ET Now?
Not much has been posted on ET now. The link/summary is below
Take away from Canfin homes (CFHL) Conference call today. Mr. Sarda Kumar Hota, MD and Mr. Atanu Bagchi, CFO CFHL participated.
Due to demonetization and Govt efforts to curb on black money, the real value of real estate will be discovered and chances are that prices may fall. CFHL hopes to benefit from this scenario as housing will become more affordable. Majority CFHL loan customers are first timer house buyers. Plus CFHL gives loan against the registered value of the property and not the AGREEMENT value.
Home buying(especially for first timers) will be easier as the property prices are expected to be more accessible.
Canfin homes is growing at a controlled pace. The key geography remains South India with cautious forays in Western and North India.
Expects some delays in loan repayments. 78% of loan book are housing.12% loans are non-housing. Sites (plot) purchase is categorized under non-housing.
Total LAP is mere 6% (50% salaried and 50% non-salaried). LAP average ticket size is 10 lacs. Canfin Homes not keen in LAP as there is no cash flow based repayment.
More money is coming into the system which will be good for Canfin Homes as the ‘cost of funds’ to lower further. Canfin hopes to pass over the lower fund cost benefits to the home buyer. Affordable housing and affordable interest rates is a sweet spot for Canfin Homes. CFHL expects a strong loan demand as more clarity comes through.
Builder loans will see some impact in short term. Though it constitutes just 0.19 % (23 crores) of CH loan book.
CFHL sticks to its guidance of a loan book of 13,500 Crore by March’17. CFHL plans to grow at 28-29% for next few quarters and hope a 30% growth rate thereafter.
CFHL does not expect a need for a fund raise in any near future.
No confirmation on Canara bank offloading its stake in CFHL.
Concerns that affordable housing (around 15-18 lacs) is not readily available. Hopeful that govt will encourage low-mid cost housing development.
Canara bank looking to sell around 13% in Can fin homes( Whenever we get good valuation so we will sell.
Same old story, we are not desparate to sell…
http://economictimes.indiatimes.com/markets/expert-view/we-will-divest-13-stake-in-can-fin-homes-rakesh-sharma-canara-bank/articleshow/55574171.cms