Dewan Housing Finance Corporation Ltd

Updated: Nov 16 2003, 05:30am hrs
Rs 500 million short-term debt programme P1+ (Assigned)

The rating reflects Dewan Housing Finance Corporation Ltds (DHFL) good asset quality and comfortable capital adequacy and earnings profile. The rating also reflects its average resource-raising capabilities and adequate liquidity despite the inherent asset-liability mismatch and interest rate risks in the housing finance business.

Rating Sensitivity Factors
* asset quality

* adequate resources at competitive rates

* profitability in light of the industrys reducing yields and its own high overhead costs

* market position in view of stiff competition within the industry

Good asset quality: DHFLs asset quality is characterised by low gross non-performing assets (NPA) of 1.03 per cent and net NPAs of 0.85 per cent as at March 31, 2003. This is supported by good collection efficiency of over 96 per cent, a moderate loan-to-value ratio and a high proportion of lending to the salaried class with limited disbursements to the riskier builder segment. The company has an average loan-to-value ratio of 75 per cent for individual loans. Its income-to-installment ratio is below 60 per cent for a bulk of its portfolio. It has stopped disbursing loans to builders since 2001.

DHFLs average loan size is small because the company operates in second-rung cities and rural areas. About one-fourth of DHFLs loans are to the rural and semi-urban segment.

The companys portfolio is unseasoned, with about 56 per cent of its portfolio having a seasoning of less than two years. Moreover, it has aggressive growth plans through both the organic and inorganic route, which may stress its internal systems.

Comfortable capital adequacy: The companys capital position is comfortable with high Tier I and Tier I capital/net NPA ratios albeit it has a small networth. Its Tier I capital adequacy ratio was 19.09 per cent as at March 31, 2003 (15.04 per cent as at March 31, 2002). The National Housing Bank (NHB) has reduced the risk weight on housing loans from 75 per cent in FY2002 to 50 per cent in FY2003, which has helped improve its capital adequacy ratio.

DHFL has outstanding securitised assets of Rs 752.1 million, wherein it has invested in class B pass-through certificates (PTC) of Rs 187 million. This means that it will bear the first risk for asset losses of up to 25 per cent of the portfolio, which effectively implies no risk transference as its housing portfolio typically has a much lower quantum of weak assets. The companys capital adequacy adjusted for securitised assets is also comfortable at 18.6 per cent as at March 31, 2003. While its Tier I capital/net NPA ratio is comfortable at 13 times as at March 31, 2003, its Tier I capital at Rs 1.14 billion is relatively small.

The companys capital adequacy ratio is likely to drop significantly given its strong asset growth plans. Crisil believes that DHFL will need to supplement its capital adequacy in FY2006 with fresh capital infusions if it pursues its aggressive growth plans.

Moderate earnings: The companys earnings profile is underpinned by a high interest spread of 2.86 per cent on account of its focus on sub-urban and rural areas. These high spreads are, however, partly offset by its high operating expenses of about 1.7 per cent of the funds deployed. The relatively high operating expenses too are partly because of the companys thrust on semi-urban and rural areas, which has resulted in a smaller average ticket size than its peers.

Going forward, the declining yields in the housing finance business are likely to be partly offset by the expected decline in its operating expenses due to significant computerisation, process automation and part implementation of the enterprise resource planning (ERP) systems introduced over the last year.

Average resource-raising capability: The companys resource profile is constrained by its relatively high costs and moderate diversification. DHFLs overall borrowing costs are high with a weighted average cost of funds of 10.46 per cent as at March 31, 2003. The company raises a bulk of its resources through the refinance available from NHB, fixed deposits and term loans from banks. These three sources accounted for 25 per cent, 24 per cent and 38 per cent respectively of its total borrowings as at March 31, 2002.

It has recently diversified its resources profile by accessing funds from multilateral agencies at competitive rates. It is also looking at securitisation as an additional funding source.

Going forward, DHFLs ability to raise adequate resources at competitive rates would critically influence its performance.

Adequate liquidity despite inherent asset-liability mismatch in housing finance industry: DHFL has adequate liquidity though it is exposed to ALM and interest rate risks because of the inherent nature of the housing finance business. It has tried to mitigate these risks by significantly matching the maturity profile of its assets and liabilities, especially by borrowing a large proportion of long-term funds from banks.

DHFL was incorporated as Dewan Housing Finance and Leasing Company Limited on April 11, 1984. It went public in December 1984 with the objective of strengthening its capital base. Currently, the promoters hold an around 46 per cent stake in the company.

DHFL provides loans to individuals and builders with the former accounting for 95 per cent of its total outstanding loan portfolio. It operates through a network of 41 branches and an outreach programme covering 64 locations.

In July 2003, DHFL acquired a 58 per cent stake in Vysya Housing Finance Ltd from ING Vysya Bank for a sum of Rs. 157.4 million. Its promoters acquired another 33 per cent stake in Vysya Housing Finance Ltd, which has recently been rechristened Dewan Vysya Housing Finance Ltd (DVHFL).

DVHFL had total funds deployed of Rs.1.93 billion as at March 31, 2003. Its growth has been minimal over the last 18 months both because of the uncertainty over its ownership and because of its high rates. CRISIL expects its growth to come back on track from FY2003-04.

In 2003, DHFL the company disbursed loans worth Rs 4.19 billion, registering a compounded annual growth rate of about 65 per cent over the last two years. Most of its business is originated in small towns, where the company has built a good market position over the years. Since it faces less competition in these areas, its yields are higher in these segments.

Industry Outlook
The demand for housing units and housing finance exceeds supply today, translating into good growth prospects for the sector. Besides, the shift towards formal sources of funding has bolstered the demand for housing finance.

The growth in the individual loans segment continues to be driven by declining interest rates, stable property prices, the fiscal incentives provided by the government to individuals on loans borrowed for housing purposes and higher credit flows from banks to the housing sector. Housing finance demand, which grew at around 54 per cent (in terms of disbursements) in FY2003, is expected to grow at around 30 per cent-40 per cent over the next couple of years. Banks are expected to gain market share by capturing a higher proportion of incremental disbursements.

Housing finance is a low-margin, high-volume business today. This is, to some extent, compensated by the relatively lower credit risk on loans to the individual segment, where moderate loan to value ratios and the borrowers psychological attachment to his home have contributed to low asset-quality-related risks.

Nevertheless, with high growth rates, especially of the kind witnessed by banks, whose housing loans portfolios are still unseasoned, it is critical for banks and housing finance companies (HFC) to tighten their appraisal and monitoring systems to mitigate any asset quality-related risks.

The entry of banks has, in fact, altered the dynamics of and intensified the competition in the housing finance industry. In this context, HFCs with a national presence would have a relatively better competitive advantage. HFCs with a regional orientation are exposed to geographical and asset-quality-related risks. The industry may witness some consolidation in future. Small players, who are unable to attract or raise capital for growth, would be especially vulnerable to takeovers.

HFCs typically lend for long periods ranging from 10 to 15 years. This exposes them to asset-liability mismatches and interest rate risks. The trend of securitising mortgages, which has gained momentum in the recent past, is expected to continue, enabling HFCs to manage their asset-liability maturity profiles to some extent. An HFCs ability to access low-cost, long-term funds would continue to be a key success factor.