NHB guidelines to hit return on equity of some housing finance companies

Leveraged entities may need to raise equity capital in near term

The National Housing Bank’s (NHB’s) guidelines on strengthening balance sheet of housing finance companies could weigh on the return on equity (RoE) of some large players, on account of the expected equity infusion requirement and inability to raise debts given the high leverage position. 

Latest balance sheets of large HFCs (excluding Dewan Housing Finance Corporation) shows that all players are compliant with the final guidelines of the regulator, including on leverage position. 

Four major non-banking housing financiers — HDFC, Indiabulls Housing Finance, PNB Housing and LIC Housing — have leverage position (borrowings to net-owned funds) of below 12 times, to be achieved by March 2022. 

However, the leverage position of LIC Housing and PNB Housing, as of March 2019, is on the upper side of the limit (10-11 times), warranting equity infusion in the near term. 

“The companies with tight leverage position will need to raise equity capital in the near term, in light of new guidelines by the NHB. This could impact their return on equity,” says Prakash Agarwal, head (financial sector ratings), India Ratings. However, the guidelines are beneficial to investors in the long term, he added.

Shares of PNB Housing and LIC Housing shed about 2.0-2.5 per cent in Friday’s session, before witnessing a recovery. 

In fact, the non-issuance of equity, along with high leverage ratio, could restrict or even lower loan book growth if the liquidity situation and demand in real estate sector worsens. 

For instance, if PNB Housing clocks 25 per cent annual loan book growth over the medium term, it will breach the tier-1 capital requirement of 10 per cent by FY2022, assuming it utilises full borrowing limits, according to a report by Motilal Oswal Securities. 

PNB Housing had clocked over 42 per cent annual growth in assets under management (indicates loan book size) during FY17-19.

The deposit base of all the above mentioned large players are well within permissible limits. 

Deposits of these companies are below 2 times their respective net-owned funds as of March 2019, against the limit of 3 times. 

Given the current issues of liquidity and demand concerns surrounding the real estate sector, investors should be selective in their exposures to this space. 

Most brokerages pick HDFC as their top stock in the housing finance companies’ space.