Asset quality should look at Indiabulls Housing Finance
Mortgage lender Indiabulls Housing Finance Ltd succeeded in preventing its asset quality from deteriorating sharply due to the fiscal year 21 pandemic. Although its asset quality indicators deteriorated during the year, this is in part due to the contraction of its loan portfolio by design.
The lender’s gross bad debt ratio climbed to 2.66% in the March quarter from 1.8% a year ago. Over the same period, the loan portfolio declined 9.6%, slightly exaggerating the overall ratios.
To be sure, Indiabulls Housing Finance’s bad loan pile has increased by 25%, indicating that the stress has indeed increased. But much of that was expected given the pandemic.
While the increase in bad debts comes as no surprise, what sets lenders apart is the extent of the provisions they have accumulated. After all, having enough or even more insurance against unwanted effects is the best guarantee for future profitability. The company held provisions totaling ₹2458 crore for stressed loans. At the aggregate level, its provisions are three times greater than what is required by regulation. Nonetheless, it remains to be seen whether these provisions will suffice in the aftermath of the second wave.
Management seems to think so and pointed out that the provisions, along with its strategy of achieving an asset-light balance sheet, made it more resilient to the negative impact of Wave 2. What works for the lender is that they didn’t restructure any loans during the quarter and their entire restructured loan stack is negligible.
So far, investors have viewed them as positive, reflecting gains of around 9% in the share price on Thursday. The doubling of the net profit compared to the period of last year also gave joy.
The recovery in profitability is largely due to a sharp drop in financing costs due to the fall in interest rates on both loans and bonds. Since interest rates are unlikely to rise, Indiabulls Housing Finance could continue to benefit.
Meanwhile, the lender also cut its wholesale loan portfolio in an effort to reduce credit risk on its books. Indiabulls Housing Finance intends to simply issue loans and manage them for a fee and take only a small portion of the credit risk on its balance sheet.
He has partnered with a handful of banks and HDFC Ltd to co-lend mortgages. In an analyst call Thursday, management said it intended to conduct 80% of its business through such arrangements during the current year.
The lender wants to reduce its wholesale portfolio to 33% of its loan portfolio by the end of the current fiscal year. This strategy has led to a contraction of more than 40% of the loan portfolio over the past two years. A pickup in retail disbursements has offset this contraction to some extent in recent months.
While this helps the lender reduce the risk of stressed real estate developers, a contraction in the balance sheet has also affected valuations. The lender’s shares are still significantly below its pre-pandemic highs last year.
Management has indicated that their goal is not to grow quickly, especially in times of stress. He corrected his stressed loan portfolio as well as the liquidity issues he faced two years ago. The share is trading at a discount from its estimated book value for FY22.
Analysts believe that improving valuations now depends on how well the company manages to control its credit risk.
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