Small Housing Finance Firms Rally As Banks Cut Lending Rate

Frontline banks and financial institutions fell, while smaller housing finance companies rallied after leading government-owned banks cut lending rates.

State Bank of India dropped as much as 3 percent after it announced up to 90 basis points reduction in lending rates. Punjab National Bank and Union Bank of India also fell after announcing rate cuts on the weekend.

Indiabulls Home Loan

Considering low return on assets, every decline in margins is significantly negative for public sector banks,” Motilal Oswal said in a report. A five basis point decline in net interest margin will impact profits of government-owned banks by up to 5 percent, compared to 1-2 percent for private banks, the brokerage added.

The bigger non-banking financial companies also took a hit in Monday’s trading, with HDFC Ltd. dropping as around 3.5 percent, and LIC Housing Finance Ltd. dropping over 5 percent.

Punjab National Bank Home Loan

Housing finance companies competing directly with banks could face margin pressure as they will also be forced to cut rates given the heightened competitive intensity in mortgage loans. “For NBFCs – HDFC, LIC Housing Finance – this was the ultimate fear, as an aggressive SBI and rate war would be negative for both growth and net interest margins,” Deutsche Bank analyst Manish Karwa wrote in a note to clients.

Meanwhile, smaller housing finance companies like Indiabulls Housing Finance Ltd., Gruh Finance Ltd., Can Fin Homes Ltd. and Repco Home Finance Ltd. rallied up to 10 percent each.

DHFL Home Loan Home Loan

Small ticket housing finance companies have pricing power on the asset side, they have been able to maintain their spreads better than large housing finance companies,” Digant Haria, an analyst at Antique Institutional Equities wrote in a note to clients.

Also, the Prime Minister announced interest subvention scheme for low ticket housing. This scheme is an extension of the already existing Credit Linked Subsidy Scheme. It reiterates our belief that government thrust on small ticket housing will be immense and that small ticket housing finance companies will benefit disproportionately.

Deutsche Bank Home Loan

Source: Bloombergquint