Sharp MCLR cuts by SBI and other banks (much bigger than deposit-rate cuts since April 2016) have surprised us negatively. In the near term, LICHF like other HFCs will likely see loan pricing pressures/higher prepayments.Banks are likely to be aggressive in pursuing loan takeovers, given weak system loan growth. Housing finance companies (HFCs) will likely be forced to either reprice old loans lower or risk higher prepayments from balance transfers.
New home loan spread, we estimate, is now 1.25-1.50%,and overall loan spread is 1.8-2.1% (1.66% for F2Q17), but new business growth is likely to be weak and we expect pressure in the next few quarters from old loan repricing even as fixed-rate liabilities take time to reprice.
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We assume half of the home loan book will reprice by ~75bp in the near term, given the size of lending rate cuts. Margins improve sharply to 3.0%, reflecting a significant decline in wholesale funding costs, strong momentum in higher-yielding project loans and loans against property, and a higher share of low-cost liabilities (NCDs and deposits). Asset quality is stable.