Post recapitalisation, we expect PSU banks to target growth, with initial bias to cut rates. This has implications for NBFCs on both assets and liabilities side. In our proprietary framework, we find salaried home loans segment among the most vulnerable. LICHF comes out as most risky on our framework — we downgrade it to NEUTRAL.
On the other hand, companies like SHTF/MMFS/SCUF which have reasonable pricing power may retain their yields. Indeed, they may end up benefitting from (i) fall in bank borrowing rates and (ii) any pick-up in economic activity post this massive stimulus. We position these as our top Outperform ideas.
The mortgage market in India is significantly underpenetrated, and should have a long growth runway. PSU impact could be on only the salaried home loan market. Players with established non-salaried businesses may continue to grow profitably. We initiate coverage on PNB Housing with an Outperform
LTFH has shown early signs of turnaround. However, post recent rally we believe the initial few years of improvement have been captured. Initiate with NEUTRAL.
Identifying vulnerable exposures to PSU re-entry: The risk from the PSU banks’ recap comes from potential lending rate aggression, especially in segments where they have traditionally been strong. While funding costs may come down for NBFCs with a high share of bank funding, those with heavy bond funding may suffer a squeeze.
Home loan market should grow — with or without PSUs: The low penetration of home mortgages (less than 17 mn families have a home loan) and the significant push from various government/regulatory agencies should ensure home loans continue to dominate retail loan growth. The re-entry of PSU banks could hurt salaried home loans (61% of the total housing finance market). However, players with strengths in other segments (in particular self-employed home loans) should be able to continue to see profitable growth. We retain our OUTPERFORM on Indiabulls (on reduced earnings) and initiate coverage on PNB Housing with OUTPERFORM.
Initiate on LTFH with NEUTRAL: While strategy under the new management is refreshing, we believe the market is already pricing in the initial few years of ‘turnaround’. We highlight that the loan book remains heavy on wholesale (with the recent surge in builder loans), and the pre-2012 infra loan book may require continuous provisioning. The stock does not have the normal valuation discount that wholesale lenders have compared to retail players — allowing negligible upside.