A laborer fixes a billboard, displaying an Indiabulls home loan advertisement, in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Why Housing Finance Companies’ Stocks Are Struggling This Year

Shares of the housing finance companies have come off their highs this year hit by rising market borrowing rates. But does the recent share price correction make them attractive? Analysts don’t think so.

Share Price Performance

All mortgage lenders, barring LIC Housing Finance Ltd., gained in excess of 50 percent in 2017. Most of them have seen doubled-digit losses so far this year and are up to 48 percent below their 52-week highs.

Here are the key concerns analysts have highlighted on mortgage lenders:

Higher Market Borrowing Costs

There has been a sharp rise in market borrowing rates. The rates for the six-month commercial paper have shot up 75 basis points in the first half of 2018 compared with a 70 basis-point increase last year, according to Bloomberg data.

Why Housing Finance Companies’ Stocks Are Struggling This Year

Housing finance companies don’t have adequate pricing power to pass on the entire rise in cost of funds as they operate on relatively narrower margins in a competitive market.

That’s expected to narrow spreads—difference between cost of funds and lending rates— which is one of the biggest reasons for the negative sentiment towards such lenders, Digant Haria, analyst at Antique Broking, told BloombergQuint. Mortgage lenders with a higher share of borrowings from the market will be hurt the most in a rising interest rate environment, he said.

Earnings Growth Concerns

The entry of newer players such as Piramal Housing Finance Ltd., Aditya Birla Housing Finance Ltd., Reliance Home Finance Ltd., and Bajaj Housing Finance Ltd. indicates a crowded market. There is also a high degree of competition from smaller public sector banks that have restricted lending to corporates.

A sizeable part of the growth in housing finance companies’ loan books in financial year 2018 came from lending to builders (developer loans) or construction finance, and loan against property or mortgage loans. For example, LIC Housing Finance's total loan book grew 15 percent during the period while individual housing loans rose just 10 percent.

Lending to builders could be lower in FY19 if real estate sales take longer to pick up.

Asset Quality Worries

While gross bad loans for most housing finance companies was below 1 percent in the year ended March, the percentage rose indicating a deteriorating asset quality.

While non-performing assets in loans against property peaked are believed to have peaked out in the last financial year, bad loans for developer loans are yet to reflect completely, said Digant Haria of Antique Broking. Most affordable housing players are saddled with NPAs in the range of 3-7 percent, he said, calling it another possible risk.

“So far, asset quality risks have not reared meaningfully for lenders. However, data for several lenders such as HDFC, LIC Housing and Repco Home shows that there is gradual deterioration in GNPAs in the retail segment, especially LAP” writes Abhishek Murarka, analyst at India Infoline, in his report.

The Valuation Picture

Barring LIC Housing Finance, most of its peers are still trading near or above their five-year average price-to-book value ratio even after a decline in share prices. Higher valuations make the segment less attractive for investors.


The risk of interest rates moving higher and the competition faced by housing finance companies may not reverse any time soon, analysts said.

Abhishek Murarka, lead analyst at IIFL, recommends remaining underweight on HFCs due to their poor earnings outlook compared to private banks and asset finance companies.

The operating environment for HFCs will become tougher going ahead. Increased competition coupled with higher interest rate outlook would dampen earnings growth going forward. 
Abhishek Murarka, Lead Analyst, IIFL
After having downgraded the sector in June 2017 on concerns of excessive competition and over-valuation, we changed our stance to neutral in January 2018. We continue with our neutral stance on housing finance sector. It’s time to get very stock selective. Incumbents with long track-record in are the best bets. HDFC Ltd., Dewan Housing Finance and LIC Housing Finance are our top picks in the sector.
Digant Haria, Analyst, Antique Broking