Margin worries for housing finance cos may bring cuts in target prices

Posted by Anurag Mishra on January 4th, 2017

Shares of housing finance companies have been laggards since demonetization, but investors might not be tempted to buy them yet as their margins are seen under pressure with top lenders, led by State Bank of India (SBI), unleashing a rate cut war. Morgan Stanley and Credit Suisse on Tuesday slashed their target prices on LIC Housing Finance by 20% and 7.5%, respectively, following the cut in a key lending rate by banks.

Housing finance company shares ended the trading session with a fall of up to 2%. Extending Monday's fall of 5%, LIC Housing Finance fell another 2% during the day. But, the stock recovered to end up 0.1% at Rs 530.75.

“The space will get more competitive with banks leading the price war and focusing on the housing segment since corporate lending is not picking up,“ said Sanjiv Bhasin, executive VP-market and corporate affairs at IIFL.

Margin worries for housing finance cos may bring cuts in target prices Margin worries for housing finance cos may bring cuts in target prices - Image

Morgan Stanley downgraded LIC Housing to equal-weight from overweight stating that the company, like others in the space, could see loan pricing pressures or higher prepayments. Starting with State Bank of India on Sunday, lenders have cut Marginal Cost-based Lending Rates (MCLR) steeply, by up to 90 basis points.

Post market hours on Tuesday, HDFC reduced its home loan rates.

“We assume half of the home loan book will re-price by 75 bps in the near term, given the size of lending rate cuts. While we need to watch if this risk materializes, this concern is likely to keep the stock under pressure,“ said Morgan Stanley .

Stocks of housing finance companies have fallen anywhere between 12% and 22% since November 8 -when the Rs 500 and Rs 1,000 denomination notes were demonetized. In the one-year period prior to demonetization, these stocks had given stellar returns of 12% to 53% as in vectors bet on the bright prospects of the housing finance segment.

Within the housing finance space, there are some companies such as Gruh Finance and Repo Home Finance which would not be impacted as much by the negative sentiment.

“It (lending rate cuts) is bad for HFCs like LIC Housing that directly compete with banks in this segment, but there are smaller players who will benefit as they will see funding costs coming down because of this and they don't compete with banks also in this segment,“ said Pankaj Agarwal, head of financial research, Ambit Capital.

However, some said they don't see LIC Housing being hit as badly. “For LIC, the negative news is in the price, “said Bhasin. LIC is down 3% since demonetization -the least among housing finance companies.


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Anurag Mishra

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Anurag Mishra
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