Emkay positive on HDFC, LIC Housing; hold M&M Fin Serv
Emkay Global Financial Services has come out with its report on banking & financial services sector. The research firm has retained its positive view on Housing Development Finance Corporation (HDFC) and LIC Housing Finance. However, advised to hold Mahindra & Mahindra Financial Services (MMFS).
October 14, 2013 / 20:13 IST
Emkay Global Financial Services's report on banking sector
- Positive ALM gap in the shorter tenure maturities, limited NPA risks given the secured nature of lending and decent return ratios makes us believe that HFC's are better placed to AFC's
- Weak economic outlook, higher LTV's (despite depreciable nature of assets) and depleting profitability of CV users have seen AFC's report 20 percent+ rise in GNPA for the past 4-quarters
- Also with negative ALM gap, current valuations do not seem to price the possible fall-out effect on the RoAs. We expect RoA's for AFC's to contract by 10-50bps over FY13-15E
- Reiterate our positive stance on Housing Development Finance Corporation (HDFC) and LIC Housing Finance (LICHF). Retain HOLD rating on Mahindra & Mahindra Financial Services (MMFS)
Our analysis of NBFCs for FY13 suggests that HFCs have a positive ALM gap of 13-28 percent vis-à-vis a 13-25 percent negative ALM gap for AFCs. The positive ALM gap for HFCs is also a result of interest rate swaps that they enter into cover their interest rate risks. The RBI's liquidity tightening measures of July 2013 had seen the shorter end of the yield curve rise 100-250bps. NBFCs had resorted to bank loans and guided for a 25-75bps rise in overall cost of funds. Lending rates were also revised upwards by 15-25bps. Clearly, NBFCs with a floating loan portfolio / positive ALM gap would stand to gain in the face of NIM pressure. The negative ALM gap for AFCs would restrict its margins / growth outlook. RBI measures for easing the MSF rate (reduced by 125bps since July 2013) and the additional term repo window have seen tapering of the shorter end of yield curve. However, the repo rate at 7.5 percent with an upward bias, the shorter end of the yield curve is unlikely to ease immediately. Also, with banks unlikely to pass the benefit of the lower cost, it would be difficult for AFCs to sustain their NIM at current levels.A deteriorating macro environment, a higher loan-to-value ratio (LTV) in the past (despite the depreciable value of the assets financed) and weak operating matrix of CV users have seen GNPA's for AFC's rise in excess of 20 percent+ for the past four quarters. SHTF / MMFS saw their Q1FY14 GNPA increase 45 percent+ yoy. Interactions with the CV financers and channel checks and rating agencies have pointed for declining collection efficiencies, increase in repossession rates and NPA's (both in 90-dpd and 180-dpd) by over 2x.With increased cost pressures and a negative ALM gap for AFC's in the short term maturities, the risk to margins is evident. Credit cost provisioning will remain high and exert pressure on return ratios. The fall out effect of this together on RoA's for AFC's will be to the tune of 10-50bps over FY13-15E. We believe that HDFC are relatively better placed to its peers given a) positive ALM gap b) growth visibility with stable asset quality and c) decent return ratios. Retain our positive view on HDFC's, HOLD on MMFS," says Emkay Global Financial Services research.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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