Housing finance companies have had it tough as the covid-19 pandemic exacerbated the problems of an already troubled real estate sector. Indiabulls Housing Finance Ltd has been no exception and the underperformance of its shares vis-a-vis the broader market should not be surprising. The lender’s shares are down 37% from its February highs, while the Nifty financial services index is down 25%.
However, the lender’s June quarter results and the accompanying outlook should provide some relief to investors. The housing finance company’s asset quality hasn’t been as bad as expected. In the quarter, the lender reported a gross bad loan ratio of 2.2%, a marginal increase from 1.8% in the previous quarter. The fact that the lender has been able to keep a lid on its bad assets, despite having a large developer loan book and loan against property, should be appreciated. Part of it is due to the de-risking strategy it adopted by running down its developer loan book. This strategy is expected to pay off. Ergo, the loan book didn’t grow at all during the quarter, which analysts had anticipated. While growth was flat sequentially, it showed a 35% drop year-on-year. “Phase of reduction in AUM growth is over,” the company said in its release. The lender is targeting an assets under management or AUM growth of 12% in FY21. Indiabulls Housing Finance has tied up with banks to co-originate retail loans.
But perhaps the most important factor weighing on investors’ minds was access to stable and cheap funding. Here, the lender did not have a big success. Its cost of borrowing has remained unchanged at 8.7%. In fact, it no longer has any outstanding short-term commercial papers. Rates on such papers have plummeted in the past six months, given the surplus liquidity and rate cuts by RBI. What’s more is that the biggest source of funding has been the selling down of loans to banks. This formed 38% of the lender’s borrowing.