Indiabulls Q4FY17 Concall Summary

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Financial Highlights

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  • Balance Sheet crossed Rs 1 trillion
  • The company’s cost to income for fiscal 2017 is down to 13.3% from 14.3% last year & 20% in the very recent fiscal 2017
  • Loan book at the end of th fiscal 2017 stood at Rs 913.01 billion as compared to Rs 686.83 billion at the end of fiscal 2016 which is growth of 33%.
  • Cash in liquid investment stood at Rs 185 billion at the end of fiscal 2017
  • Asset mix at the end of 2017 split broadly into 56% home loans, 22% LAP, & 22% of corporate mortgage loans. Housing loan book increased from 56% of total loan assets up from 52% at the end of fiscal 2016. The company is confident to get 66% share of home loans within total loan asset book by fiscal 202
  • The company’s top line registered healthy growth with a revenue for fiscal 2017 at Rs 117.02 billion, a growth of 27%
  • The NII for fiscal 2017 stood at 47.68 billion, which is a growth of 25.7% over previous year. The NII for quarter four fiscal 2017 is at Rs. 13.60 billion as compared to quarter four of fiscal 2016 at Rs. 11.16 billion, which is a growth of approximately 22%
  • Fee income for the quarter is 193 crores.
  • At the end of fiscal year 2017, 51% of company’s liabilities were coming from bonds vs 38% in last fiscal year
  • The company expanded into Tier-II smart cities which are already accounting for 7% of home applications
  • The company’s Balance sheet stands at Rs 1.04 trillion, up about 36% over last year
  • Total loan assets are Rs 913 billion, up about 33% from 687 billion last year
  • Profit After Tax is at 29.06 billion, which is up 24% from corresponding last year
  • 36% Balance sheet growth versus 34% in fiscal year 2016
  • A growth of 33% in loan assets as against 31% growth last year
  • Government agencies and regulators are coordinating policies and aligning fiscal incentives to further the government's headline socioeconomic objective 2022.
  • For Q4FY17, the company did about 6000 crores of home loans, just under 2000 crores of LAP of corporate mortgage loans.
  • On an incremental basis home loans got just under 9%. LAP got 11.25%, & commercial loan 12%. On book basis the yields in home loans are at 9.7%, LAP at 13.5% & commercial loan at 14%
  • The company has a tax break on deferred tax asset side of roughly a little over Rs 100 crore approximately Rs 125 crores. The company has chosen to provide another Rs 125 crores this quarter. It has made total credit cost including write offs & provisions of Rs 311 crores
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Disbursals

  • In fiscal 2017 company disbursed a total of 354.82 billion, a growth of 34.6% over disbursals last year of 263.58 billion
  • The breakup of disbursal are Rs 182.44 billion for home loans, Rs Rs.66.91 billion for LAP and Rs.105.47 billion for corporate mortgage loans
  • For Q4 disbursals were roughly Rs. 150 billion, breaking into Rs.64 billion for home loans, Rs. 20 billion for LAP and Rs.31 billion for commercial credit, besides one-time syndication type of arrangements for another Rs. 30 billion where company disbursed and got those assets refinanced within the quarter

Business Updates

  • The Company got included in Nifty 50 index
  • The Board has approved interim dividend of Rs 9 per share. By Q3 the company’s profits will be at a level where dividend proposal to the board will start increasing from Rs 9 per quarter.
  • The company launched India’s first digital e-home loan platform, it is accounting for 20% of new home lone sourcing
  • E-home loans is very advantageous. Home loans will generally have operating expenses which will be in the range of 70 basis points - 80 basis points on book basis and for this particular portfolio that number will be exactly half or less than half. Other costs like credit mistakes & frauds will be reduced. On per loan basis the company is saving 40-50 basis points as this product scales up it will give meaningful saving of almost 10-12 basis points savings on annualized basis. The e-home loans platform will continue to form biggest tool to become most convenient home loan provider in the country
  • Expansion into Tier II cities is also going well. The company now has 43 of new branches completely technology driven with online completion & transfer of the loan application files for credit underwriting in a hub & spoke model. 
  • Smart city home loans have grown 7% of new incremental home loan application. E-home loans now contribute to as much as 20% of incremental home loan applications
  • The company has been realigning emphasis towards more & more lease rent discounting type of structure. There are opportunities where the company get larger transaction of which the company can hold only small portion. So the company will do larger deal with back to back arrangement with a few banks & hold its portion & sell down the rest of it. These will largely be lease rent discounting transaction & would come in Q4 as the company is able to originate assets at a much faster pace, but company cannot hold all those assets, so it will share some of those assets with some of the other private banks
  • The market for such assets is approximately 3000 crores

Pradhan Mantri Awas Yojana

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  • Under pradhan Mantri Awas Yojana, coverage of housing has been expanded to mass market mid income housing for the first time. Households earning annually up to Rs 1.8 million per annum, purchasing their first house of upto 1185 sq feet with no bar or cap on the value of the house are now eligible for an upfront subsidy of as much as Rs 230000 towards their home loan. In addition to this the customer can also claim a deduction of Rs 4,00,000 from their taxable income against principal & interest component. All factored in the house of Rs. 3 million purchased a building alone of about Rs. 2.4 million, roughly 70% loan to value, which is a squarely mass-market mid-income affordable housing product, which only costs a borrower today 0.42% over the loan tenure, or 42 basis points. 
  • With the PMAY subsidy and tax savings factored in, the mid-income home loan borrowers only have to pay Rs. 2.43 million against a Rs. 2.4 million home loan over the life of the loan.
  • Compared with an effective home loan rate of 0.42%, the average rental yields for the top 12 cities is 3.2%. this is a tremendous incentive to purchase a house and make home ownership a very affordable proposition and much cheaper than renting
  • The company does more of mid income group lenders. Government has brought down the effective interest rate for the mid income group. Due to tax subsidies which is between 3% to 3.5% & there is convergence of tax subsidies & rental yield & the EMI. Even if Pradhan manri Yojana is taken away there is situation where EMI cheque & rental cheque are equal. With the Pradhan Mantri Yojana it is almost free to borrow at 42 basis points there is effectively no cost now. So company believes that there will be surge in demand. Many developers are focusing on bringing in more affordable housing & witnessing slowdown in premium housing segment
  • The company expects to see results of Pradhana Mantri Awas Yojana from Q2 of fiscal 2018

NPA

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  • NPA for over 22 quarters have remained within a range of 0.7% to 0.9% as was guided in 2010. 
  • Gross NPA’s were at 85 basis points & net NPA’s were 36 basis points
  • In computing net NPAs, only provisions against substandard assets are deducted from the gross NPA. Standard asset provisions and counter cyclical provisions of over Rs. 7 billion are not deducted while computing net NPAs.
  • The company has been prudent in provisioning approach & provisions which are approximately 150% of our gross NPA, with excess provisions running at Rs 3.74 billion
  • Total sub standard asset provision were about Rs 5 billion at the end of Q4 of fiscal 2017, general provisions and specific provisions splitting almost equally.
  • Floating provisions at Rs. 0.75 billion and standard provisions at Rs. 6.25 billion, totaling to Rs. 11.49 billion.

Borrowings  

  • Net leverage after deducting from total borrowings, cash and cash equivalents and liquid investments stood at 5.7 times.
  • Bank borrowings now form only 37% of our funding mix, down from 49% in March 2016
  • Capital markets sources along with ECBs and sell-downs have contributed to 96% of the incremental financing and company’s dependence on banks for growth of this year was only 4%. 51% of company’s funding now comes from bonds, up from only 38% at the end of fiscal 2016.
  • Spreads for quarter four fiscal 2017 expanded to Rs. 324 basis points on book basis, up from 318 basis points at the end of fiscal 2016. This is an increase, despite the perceived enhanced competition. The spread on an incremental basis is at 275 basis points, cost of funds on book basis was at 8.39% and dropped significantly as MCLR changes were passed on stock of bank loans as well as on the sold down book.
  • On an incremental basis the cost of funds is 7.83% for quarter four. Borrowing flexibility has ensured spread will sustain within the guided range of 300 basis points to 325 basis points on book and between 275 basis points and 300 basis points on incremental loans.
  • Net worth at the end of Q4 fiscal 2017 stood at Rs. 121.22 billion, up from Rs. 106.94 billion at the end of Q4 fiscal 2017, and Rs. 117.86 billion at the end of Q3 fiscal 2017.
  • Total capital adequacy adjusted for investments in mutual funds stood at 21% at the end of quarter four with Tier-I at over 17%.

Macro data

  • With the mortgage to GDP penetration of all of 9%, effective interest rates prior to the subsidy having dropped to between 3% and 3.5% and after the Pradhan Mantri Awas Yojana the effective interest rates have dropped to 0.42%.
  • With a capital base of over Rs. 12,000 crores and unique technology platform which company has built, company is very, very optimistic about continuing to grow profits by between 20% to 25% through fiscal 2017 and the book between 25% to 30%. Company reiterates that long-term guidance, which is book growth between 25% and 30% and growth across all other financial parameters between 20% and 25%
  • Company is very optimistic about 2020 & sees its balance sheet double double & also reach Rs 2 trillion mark with profits well above Rs 5500 crores. Off the balance sheet, approximately 66% will be home loans by 2020.
  • The company is hopeful that it will bring down cost which is currently 13% to single digit
  • So the goals of company are Rs. 2 trillion of balance sheet, over Rs. 5,500 crores of profit, 66% of home loans and single-digit cost to income ratio for 2020
  • RBI has expanded the definition of affordable housing & now all across all relevant agencies be it RBI, NHB, etc everyone has aligned & the subset of the policies that each of these departments have cover all the loans that Indiabulls Housing gives under the home loan program at a average ticket size of 2.4 million with an average income level of roughly Rs 1 million annualized
  • According to the RBI financial stability report & NPA numbers even housing loans they indicate in a number of roughly 170 basis points which mean that the 40% of the market which is housing finance companies reporting gross NPA loans of between 70-100 basis points , private banks being in the same ball park. There is a large part of the financial system which is running delinquencies within the housing loan portfolio of 300 basis points to 500 basis points. The overall corporate credit growth is not happening. The company has achieved its target of Rs 1 trillion of balance sheet size which was actually of 2018 target.  Therefore there is very robust demand & if credit growth remains as subdued that demand is only going to grow. The company does not have enough loan assets that it can potentially sell
  • LAP book is very sticky book given the fact that unlike home loans where there is no prepayment penalties, there are massive prepayment penalties of 3% to 5% in LAP book. And therefore, in a situation where interest rates are falling the average age of the LAP book actually does not change materially but the average age of the home loan book can potentially come down, if you are not continuously repricing your back book as well. So, in the case of home loans the gap would be a lot lesser because you have to continuously re-price back book in order to not allow a net outflow
  • The company believes that premium housing is on a decline & is not growing, whereas affordable housing is growing some where between 30-35% across housing sector. Government has given massive tax incentives to developers in Thane & Virar or Vasai where they are not paying corporate tax on such development. Mass housing is growing at a robust speed. 

RERA
 

  •  RERA is a very good development. The company is optimistic about RERA. According to the company commercial lending book is concerned it has concentrated book around a few largest developers in the country which are around 60-70 only.
  • Real estate brokers have divided their projects into 2 buckts – one which have not received occupancy certificate & another is which have all calculated their liabilities around it. 
  • The demand for construction finance is going to go up significantly. Fortunately, the regulation carves out forbearance for construction finance, both from Principal as well as interest servicing.
  • With RERA the company is confident that as both home loan provider & construction finance provider that the money which is being disbursed is used for only specific purposes & there are not only civil liabilities but also criminal liabilities which will arise if the money is misused. 
  • Portfolio quality will develop & it is a positive development

Capital Requirements

  • Government of India & RBI have included affordable housing in the automatic ECB route. The company will shortly raise as much as $750 million through the ECB route & another $500 million through masala bond route.
  • The company currently has $500 million on ECB outstanding & did refinancing of $350 million by Japanese, Taiwanese & other investors.
  • The company also had 25% institutions participate in last masala bond offering. So on ECBs the company will explore whether to do a offshore bond or a offshore loan structure
  • On masala bonds it is generally a bond which is a rupee-denominated bond, but company has opted the $1.2 billion which is permissible under both of these routes, & hopes  to get to at least $1 billion of overseas debt raise through both of these routes through the course of the year
  • Overall, company has to borrow approximately Rs. 50,000 crores for the year, of this Rs. 50,000 crores company is hopeful that at least 70% to 75% will come from the markets and the balance will come from banks in one form or the other
  • As the company surpassed the $ 1 trillion of balance sheet mark, it has slowed down the securitization this year
  • The company has sold down only 19% of securitization loan as against trend of 25%
  • So, next year onwards the company should be back to consuming approximately 1.5% to 2% of capital every year and strive to keep it at about 1.5% of capital every year
  • Its capital should therefore be next year and the year after also be about 15% of Tier-I and 18% of overall capital adequacy
  • The company cannot say whether it will raise a dollar bond, euro bond but through the offshore route it will look to raise about $1 trillion
  • The company has all large state & private insurance companies subscribing to its bond, including provident funds. It has a very vibrant bond borrowing program. Over 50% of borrowing are coming from the bond market route. Incrementally the company has grown its balance sheet & loan book over30%.
  • The capital employed with respect to oak north it is around 150 million
  • The company thinks that it does not need infusion of capital as it has people who run $90 billion market cap companies are extremely solid investors who can stand for the longest
  • The credit cost for the financial year will be 60-70 basis points
  • The company does not need to raise capital as it is well capitalized for next 2 financial years. It has growth of 25-30% & assuming that it securitizes between 20-25% of incremental loans. The company hardly has Tier II capital which is at 3%. Hence it is reasonably comfortable as far as capital is concerned.
  • The company want its Tier I capital to be at 15%
  • The company has a long term policy of maintaining liquidity at 20% of loan book. It has loan assets roughly of Rs 90000 crores & 20% of that is a little over Rs 18000 which is in liquid
  • The company believes that retail part of the business which is predominant part is distribution franchisee which is created over a period of time & any distruption in that will cause long term damage, therefore it is important to maintain liquidity. Also the feels that it has continued to disburse where others have shut shop which helped it accelerate the process of building on the distribution channel. A large amount of gains both in terms of acceptance of company’s bond as well as yield shrinkage that company had to do after it was upgraded to AAA by 2 rating agencies in 2014 was mainly due to its liquidity
  • Over the time the company borrowing program would evolve to 60% bonds, ECB’s, 20-25% bank borrowing, & 20% of securitization. The company is 47% right now between bank borrowing & securitization. Over a period of time it will drop to 40% & that 7-8% will go to Bonds & ECB. The migration will be in 3 years.

Future Guidance

  • For FY18, the balance sheet and the loan book will both grow between 25% to 30%, given the overall optimism
  • Similarly, for profit and NII and all of that, company is hopeful of keeping that between 20% and 25%, specifically for profits again to be at the more higher end of the range. On cost to income ratio, the target is to bring it down by roughly 70 basis points to 80 basis points and get it in the handle of 12.5%
  • The company has historically maintained a guidance that it will maintain spread of between 300 basis points to 325 basis points & on incremental basis between 275 basis points & 300 basis points.In this quarter, the company is on the higher end of the range as far as the overall book is concerned & at the lower end of the range as far as incremental business is concerned.
  • The company expects that over a period of 1-3 year when the company plans to increase borrowing program, it is at advantage of 50-60 points which at peak was above 100 basis point. Even if interest rates are to remain flat it can still bring down borrowing cost by 50-60 basis point. So, if home loans have to grow at roughly 1% or so per quarter and are to go in the direction that by March 2020 one is reasonably confident that book spreads will remain around 300 basis point
  • The company is positive about credit rating agencies & it feels that they are lot more optimistic about the macro which is always 70-80% of such decisions. They are very confident about macros of Indiabulls Housing.
  • Indiabulls home loan product will continue to grow well above 30%
  • For LAP market the company has concerns. Earlier it was heightened competition, then demonetization & then fear of small business owner defaulting.
  • The company believes that demonetization will help grow formal economy, which in turn will grow the demand for structured credit including lending from formal system is going to go up.
  • The company believes that the next couple of years around LAP & small business owner lending are going to be very robust period of lending.
  • The company’s long term NPA guidance is that it will operate between 70-90 basis points gross & 30-50 basis points of net. Currently it is at 85 basis points & 36 basis points & it will remain in this ballpark for 2-3 years. So, the guidance will be (+/-2) basis points for gross NPAs and (+/-2) basis points for net NPAs from where they are right now
  • GST will formalize the system further & that would work to the company’s advantage

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