24 June 2013

Banking & Finance

INDIAN FINANCIALS: Revision in risk weights and provisioning

requirement for CRE and housing loans; Relief for financiers; Not

yet applicable for HFCs

‐

RBI has come out with the notification related to prudential requirements for

housing and commercial real estate (CRE) loans wherein they have divided CRE

exposure into housing and non housing projects and accordingly different

provisioning and risk weightage requirement.

RBI has also marginally altered the requirement for housing loan of financiers.

While this notification is applicable for Banks, NHB will have to come with

different notification for HFCs. This notification will provide marginal relief to

banks in case of capital requirements.

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Commercial Real Estate – Residential Housing: Carved a separate sector

A separate sub‐sector Commercial Real Estate – Residential Housing (CRE‐RH) has

been carved out from the CRE Sector. The key criterias for this sector are:

‐

CRE‐RH would consist of loans to builders/developers for residential housing

projects (except for captive consumption) under CRE segment.

‐

Projects should ordinarily not include non‐residential commercial real estate.

However, integrated housing projects comprising of some commercial space

(e.g. shopping complex, school, etc.) can also be classified under CRE‐RH,

provided that the commercial area in the residential housing project does not

exceed 10% of the total Floor Space Index (FSI) of the project.

‐

In case the FSI of the commercial area in the predominantly residential housing

complex exceeds the ceiling of 10%, the project loans should be classified as CRE

and not CRE‐RH.

Provisioning and risk weightage requirement for CRE‐RH and changes into residential

housing loan requirements

Remain positive on Housing Finance segment

‐

In the current uncertain economic environment, where most financial

companies (banks and NBFCs) are facing major challenge on growth and asset

quality front, Housing Finance Companies (HFCs) remain unscathed. Asset

quality is also expected to the best among the entire asset classes due to cash

flow based lending (installment to income ratio of ~40%), higher equity

contribution of borrower and the strong immovable collateral in place.

‐

Structural drivers like low mortgage penetration, increasing urbanization and

share of working population, income tax benefits, rising culture of nuclear

families and disposable incomes will keep growth rates healthy for HFC.

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Banking & Finance

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HFCs are benefiting from easing wholesale rates in the bond market and are

increasingly borrowing through instruments like bonds/NCDs which are much

below the bank base rates. Low wholesale rates augur well for margins &

spreads.

HFCs have consistently delivered superior and consistent performance across

different rate and growth cycles and varying competitive pressures.

HDFC

(~20%), LICHF (~12%) and DEWH (~5% market share) will remain a key

beneficiary of the structural growth opportunity with the superior return ratios.

Reiterate strong buy on the sector and among the large caps HDFC remains our

preferred pick with a target price of INR970 (18% upside). We also have Buy

rating on LICHF with a target price of INR 295 (15% upside) and DEWH with a

target price of INR320 (85% upside).

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23

Banking & Finance

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