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Mortgages driving retail growth reacceleration; developer financing still remains moderate

We hosted a call with Raoul Kapoor, COO of Andromeda (India’s largest DSA), and a Real Estate Finance expert from a large financial institution at our ‘Emkay Konnect’ Festive Conference to understand the credit demand in the retail and developer financing space in the run-up to the festive season.

* Historically high disbursements in mortgages; Micro-LAP segment gaining momentum: Andromeda (DSA) has clocked historically high disbursements in Sep’21 at Rs27bn (Rs8bn in Sep’20 and Rs20bn in Sep’19), mainly driven by mortgages (HL: Rs13.4bn, LAP: Rs7.5bn, PL/BL: Rs6bn). The main driving forces behind this were the benign rate environment, attractive property prices and customers’ greater desire for house ownership/bigger house sizes.

In addition to the surge in the mid-market to high-ticket housing finance space, micro-lap (ticket size: ~Rs2-2.2mn) segment combined with unsecured business loan segment is also thriving, thus offering a better blended yield and security to banks. That said, lender aggression in unsecured PL/BL is still low, indicating underlying risk aversion. Andromeda spent 35-40% of its time in collections during the pandemic to support lenders. This has come down meaningfully, indicating improving asset-quality trends, except for the affordable housing segment.

* Banks continue to rule the mortgage space; NBFCs are also coming back to the market, though slowly: Banks continue to dominate the home loan market, led by large private banks/PSBs armed with lower lending rates. They will benefit on the margin front during an upward rate cycle. Top-4 mortgage players are SBI>HDFC>ICICI>BOB, but Kotak has moved up the ranks with strong disbursements of Rs40-45bn in September. IIB, IDFC and Federal Bank are reaccelerating the pace of growth in secured/unsecured loans.

Except for Bajaj Finance and HDFCL, most NBFCs/HFCs (PNB Hsg, LTFH, etc.) have not shown pre-Covid aggression, but are trying to make their presence felt. Piramal Housing is likely to emerge as a strong player in the housing segment and should try to re-capture the markets beyond Tier-I/Tier-II cities, which were strongholds of erstwhile DHFL. Separately, large auto dealers at our conference also hinted at demand returning back in MHCV/LCVs, while the car business is hurt by chip shortage and TWs by weak rural demand.

* Developer financing gains pace too, though lenders are selective: The strong housing demand is reflected in rising new project launches in the mid-large ticket size (units>Rs10mn) segments. Hyderabad in South and Calcutta in Eastern India are emerging as the new growth hubs. The commercial lending space remains unclear amid continued Work from Home/anywhere trends and the shifting of back-offices to Tier-II cities & beyond. As per the expert, though the confluence of DCCO extension and stamp duty/rate cutinduced higher sales have helped leveraged developers, they will take time to fully recover. Thus, except for large HFCs/NBFCs (HDFCL, Piramal), other players are reluctant to write big cheques. The market has moved back to banks (including some PSBs) that are typically conservative (do not fund land), and thus growth in the segment will be gradual.

* Our view: We expect overall retail credit growth to accelerate further in the run-up to the festive season, led by mortgages. Cards in the unsecured segment and CV in the VF segment are showing early signs of a revival. And, we expect PL, Car loans to gather momentum gradually as the underlying credit appetite remains strong.

Current market conditions favor banks armed with lower funding rates and strong B/S. We believe ICICI (Buy) and HDFCB (Buy) will be the key beneficiaries of post Covid pent-up demand and festive cheer in retail loans. Kotak (Hold) has raised the mortgage game with the lowest rate offering, but will need a pick-up in VF demand too to clock strong overall growth. Kotak is considered to be one of the key contenders for Citi’s card portfolio, and thus any newsflow relating to this will be closely tracked. Among PSBs, we like SBI (Buy), the undisputed leader in home loans, which is making aggressive strides into VF as well.

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