NBFC Sector Update : Earnings trajectory remained robust for housing financiers despite pandemic, driven by credit cost remaining at <1% - ICICI Securities
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Profitability across NBFCs-HFCs remained robust during the past five years despite covid as reflected in RoA for select HFCs witnessing steady improvement to 2.9% by FY23 vs 1.8% / 2.2% / 2.4% / 2.4% / 2.7% during FY18 / FY19 / FY20 / FY21 / FY22, respectively. Despite most NBFCs and HFCs catering to informal segment (self-employed as well as salaried) – which is considered to be more vulnerable than formal segment – credit cost remained below 1% between FY18-23. The same reflects borrower-level resiliency and improved awareness about maintaining credit score and housing financiers’ expertise in sourcing customer with the intent and the ability to pay (cashflow assessment without formal income proofs). Prefer PNB HF, Home First and Aavas within the housing finance space.
Profitability for mortgage financiers remained robust between FY18-23 despite covid
Return ratios across mortgage players remained robust with average RoA at 2.4% between FY18-23 even during pandemic and despite most financiers catering to informal self-employed segment. Strong profitability metrics across players (including covid phase) indicate strong merits of housing finance as a product over other products like vehicle financing, OD/CC, MSME loans etc. The same reflects in lower write-offs (average 30bps during FY18-23) and average slippages at <1% between FY18-23.
Average write-offs at 30bps between FY18-23 with peak at 40bps in FY21
Conservative LTVs (thus, high customer skin in the game), increased awareness amongst borrowers about maintaining credit score and careful selection of customers by lenders (preference for self-occupied and single property) with focus on intent and ability to pay are key enablers for <1% delinquencies over FY18-23. The same resulted in lower write-offs at an average 30bps during the same period, with players having higher exposure to builder loans having higher write-offs.
LGDs in affordable housing space remained at <20%
As per our analysis, credit losses in housing finance space remained at sub20%. Delinquencies between FY18-23 for mortgage financiers remained at <1% while write-offs stood at 30bps, implying ultimate credit loss of <20% of delinquencies. The same reflects borrower level resiliency and the intent to pay. It also indicates a strong underwriting model built by housing financiers, especially affordable housing finance players.
Affordable housing finance players are best placed
Affordable housing finance players scored well on three key parameters – growth, asset quality and profitability – during the past 3 years. Aavas / Aptus / HomeFirst delivered 25-40% AUM CAGR between FY18-23 with steady improvement in RoA during the same period. Despite catering to vulnerable segments as reflected in yields at >14% (higher than super prime and prime customers), write-offs and delinquencies for AHFCs remained lower than other housing finance players.
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