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Divergent trends; what encourages, what fails to cheer

Operating performance trends for housing financiers were quite divergent in Q1FY22 and we pen down a few notable trends. We also highlight how they fared vis-à-vis I-Sec expectations as well as against each other.

What encouraged: 1) Developer collections were not too adversely impacted; stress pool for the developer segment was broadly stable; 2) rise in stress pool for salaried customers was more contained.

What gives confidence: 1) July bounce rates / collection efficiency are at least similar to, if not better than Mar’21. 2) Cumulative provisions cover significant portion (60-100%) of outstanding stress pool; incremental provisioning is expected to be capped at <1%/0.8% over FY22E/FY23E. What failed to cheer: 1) Restructuring was prominent in nonindividual loans; HFCs in affordable housing segment witnessed home loan restructuring requests. 2) Disbursements were down 40-60% QoQ; modest growth in non-individual segment dragged overall AUM growth.

* Our preference rests with HDFC, JM Financial, and affordable HFCs including Repco: HDFC’s superior portfolio quality with nominal rise (40-50bps) in individual loan stage-2/3 and steady non-individual stress pool, contained credit cost sub60bps. LICHF, on the contrary, exhibited volatile operating metrics with spike in stage-3 assets (5.93%), restructuring at 2.3% and exponential stress in corporate developer segment at >50%.

LICHF’s cumulative provisioning at only 2% still appears inadequate. Aavas Financiers and Repco showed signs of mild stress emerging in its portfolio (but is confident of normalisation in coming quarters), while HomeFirst surprised positively. JM Financial and Piramal’s stress pools were relatively stable. For PNBHF, though stress accretion was elevated as expected, lower credit cost led to earnings beat.

* Collection efforts were hit amidst restricted movement… Collection efforts were hindered due to employee safety-first approach and restrictions on movement. Collection efficiency was down 3-5pps from Mar’21 levels and home loan stage-2/3 rose for HFCs. Stress pool was managed in line with expectations for HDFC, Aavas, HomeFirst and deteriorated relatively more for LICHF and PNBHF.

* …retracing to Mar’21 levels in Jun/Jul’21 suggesting stress should descend: Within home loans and LAP, customer profile aligned towards self-employed borrowers witnessed relatively higher stress in the retail segment. Amongst affordable housing financiers, Aavas witnessed spike in 1+dpd to 12.67% (vs 6.37%/8.21% in Q4/Q3FY21 respectively), while for HomeFirst it was contained at 8.9% (6.2% in FY21). Collections in Jun/Jul’21 have been encouraging, which suggests 1+dpd has peaked out and will likely descend hereon. All HFCs highlighted that Jul’21 bounce rates / collection efficiency are at least similar to, if not better than Mar’21. This gives confidence on asset quality stabilising soon and the benefits of improved collection flowing through in coming quarters.

* Developer collections supported by strong sales in H2FY21: Developer collections were not adversely impacted due to strong sales witnessed in H2FY21 as well as aided by slab-wise collections as per the stage of construction. Construction activities were at ~80-90% of levels witnessed prior to covid second wave. Developer sales were down; however, it bounced back in Jun’21. Nonindividual stage-3 and stage-2 pools were steady for HDFC and Piramal (positive surprises) while, on the contrary, the same rose for PNBHF and JM (on expected lines). LICHF disappointed the most with further spike in stage-3 on developer loans to 24%.

* Restructuring prominent in non-individual loans; affordable HFCs witnessed home loan requests: For prime home lenders (HDFC, LICHF), restructuring was more prominent in non-individual loans – constituting more than two-thirds of the pool. LICHF surprised mainly with 30% of its developer book being restructured. Retail restructuring was less than 30bps.

However, all requests have not been fully implemented and there will be more flows in Q2FY22. For affordable housing financiers, restructuring requests that were absent in FY21, resurfaced in Q1FY22. It constituted 60-120bps of their AUM with another 50-75bps being in the pipeline. Repco had witnessed highest restructuring of >5%. Absence of incremental restructuring for PEL and JM was a positive surprise.

* Credit cost for affordable HFCs in FY22 to be higher than recent averages: Credit cost for HDFC at 20-30% for affordable HFCs. The latter are investing consistently into building their distribution franchise and increasing people/process capabilities.

* Modest non-individual growth dragging overall AUM growth: Growth in nonindividual loans moderated due to sell-down, prepayments/repayments and conservative approach. However, incrementally, there is healthy pipeline of LRD and project loan proposals and financiers are selectively looking for growth in this segment too. We expect high single to low double digit growth for non-individual loan growth of HDFC, JM, PEL, PNBHF.

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